You may have heard recently that “people are smart.“ Of course, you probably didn’t need a silly commercial to tell you that. But since its also true that some people are smarter than others, it’s important to also mention the obvious:
The truth being that “No Closing Cost” mortgage advertising is so flagrantly misleading that state regulators in California have actually outlawed the use of such phrases in any homeloan advertising.
The reason for this is that these lenders are not truly "waiving" your closing costs at all- instead, what they’re offering to do is “offset“ them. They do this by receiving a kickback income from giving you a much higher than market interest rate; this kickback is also known as Yield Spread Premium, or YSP.
Worse yet, if the mortgage company is a correspondent lender or bank, like Ditech, they don’t even have to disclose this sweet little compensation; a reward that you end up paying for many times over throughout the life of the loan.
When you hear the term ‘No Closing Cost’ for your mortgage you need to keep in mind that there are always closing costs. The attorney needs to be paid and there are usually city or country fees as well. The actual closing cosst will vary by situation but there will be some closing costs.
When a loan is advertised with no closing cost it only means that someone else it paying the closing costs for you and this is usually the lender or the broker. Well, if they are paying the costs then they are most likely making it up some where else. Remember to compare your ‘No Closing Cost’ rate with that of a mortgage in which you pay the full closing costs. Then you are in a better position to decide which is right for your situation.
As with all things in life...there is no free lunch. Read the fine print when you get a no closing cost mortgage. You will find after talking with your mortgage broker that there maybe a much better deal waiting for you in the wholesale lender market.
No Closing costs loans can be good for short term solutions, where you would've paid more in closing costs than in additional interest over the time you plan on being in the mortgage for. For example, if closing costs are $4k and if your "no closing cost" payment is only $100/mo more than the "full closing cost" payment, then if you spend 40 months or less in that mortgage (40 months x $100 = $4k in closing costs you avoided) it'd be a better option to go for the No Closing cost option.
The No Closing Cost label is often missapplied by advertisers who in fact do charge closing costs, whether hidden in the rate or explixitly billed to you. In fact, a better way to look at No Closing Cost loan offers is to remember that they are generally referring to "No Out of Pocket" or "No Up Front" closing costs.
Consumers need to work with a mortgage agent that works with you, finds out about what your current and future intentions are, and works up different options and give you a choice in what mortgage is best for you. A no closing cost loan may be your best option for some circumstances, but taking on a mortgage that has closing costs could be your best option for other circumstances. Mortgages are not a "one size fits all type of service. Each mortgage should be planned and provided for each individual consumer and best fit their current and future needs. Therefore, be hesitant about doing a no cost mortgage or whenever you see a no cost mortgage advertised because it may not be the best loan for you and may end up costing you much more money overall.
The large companies that advertise no closing cost loans try to make them sound like they are benefiting the borrower. In reality they hurt the borrower over time and can wind up costing homeowners ten's of thousands of dollars in extra interest over the life of the loan. However for borrowers that know they will only be in a property 3 or so years may benefit from a no closing cost mortgage.