No Cost Mortgages– Where’s The Real Cost?
Lets’ face it there are always costs associated with mortgages. Although we hear about, and see in the newspapers, advertising for "no cost" mortgages all the time. The fact is mortgage brokers are only in control of some of the charges whether the new loan is a refinance or a purchase. Therefore, they don’t have the ability to waive the fees or otherwise not charge them.
These are some of the fees that are required in the approval process of obtaining a mortgage: 
Appraisal fees
Title insurance fees
Notary fees
Tax service fees
Escrow fees
Document fees
Processing fees
Flood certification fees
Recording fees Wire fees
The term "No-Cost" simply refers to the fact that the loan officer pays the various fees of the loan and that those fees aren’t charged directly to you
There are only two ways a loan office can pay these fees on your behalf:
1.)By getting paid by the lender on the "back end" with service release premiums or yield spread premiums. Sometimes these two terms are used interchangeably and referred to as the "premium"
2.)By reducing his/her commission (if he/she charged an origination fee)
When there is money to pay fees "on the back end" the loan will have a higher interest rate, which ultimately costs the borrower money in the form of a higher monthly payment.
A key to understanding how loan officers make their money is to recognize the sources of the money itself. It’s certainly reasonable to expect a loan officer to get paid for his efforts but how much?
I believe that decision is between the consumer and the loan officer. However, that decision should be made in good faith with a full understanding of the facts.
Loan officers can generate revenue from both you, the borrower and by the lender through premiums as discussed earlier. That revenue can either be passed through to the loan officer as income or can be applied to settlement charges. It’s that simple. Regardless of the advertising or terms used the fact is that revenue can come from two sources and can be applied in a variety of ways.
Each day and sometimes several times a day, lenders generate rate sheets for their loan officers. 
In the example columns shown on the right, the rate of 5.75% is the "par" rate meaning it has no cost associated with the loan. At the par rate there is no revenue coming from the lender to the loan officer so all commission to the loan officer would have to be charged in the form of an origination fee. Furthermore, all fees would have to be paid by the borrower or the loan officer (presumably from the origination fee) If you want a lower rate, you will have to pay “points or “discount” to “buy the rate down”. A point is one percent of the loan amount being borrowed. For example if you want a 5.25% rate you will have to pay 2.0% discount PLUS an origination fee to the loan officer (they don’t work for free) PLUS all of the settlement charges.
If you are willing to take a higher rate, the lender pays a premium.
This is where a loan officer can make additional revenue “on the back end”. Using the rate sheet example on the right again: If you wanted to do a “No Cost” refinance the loan officer would price the mortgage at a rate which would pay enough premium to cover both the charges and his/her commission. Example: Lets say you are applying for a $200,000 mortgage, your approximate settlement charges are $1,500 and the loan officer wants to make $2,000 in commission. The rate would have to be 6.25%. Here’s the math:
Charges plus commissions equals: $3,500
Discount required to cover the $3,500 according is 1.75% (3,500/200,000)
The rate that pays 1.75% or greater is 6.25%.
One of the ways I recommend you determine if letting the premium pay your closing costs is to decide how long you plan to live in the property or how long you plan to keep the current mortgage. You can easily calculate the "payback period" for paying your own fees by determining the difference in monthly payments between the rate of the “no cost” and the rate of the par rate. Then dividing that difference into the costs of the fees. Using the example above:
a $200,000 30 year fixed rate mortgage at the par rate of 5.75% is $1,167.15/month
whereas the payment of the “no cost” at 6.25% is $1,231.43/month
for a difference of $64.28 each month. The closing costs of $3,500.00 divided by the monthly savings of $64.28 is 54.4. That is to say the “pay back” period is 54 months.
In this example: if you plan to stay in the home for greater than 54 months you would not benefit from a “no cost” and would benefit from paying the closing costs yourself.
Here’s a simple mortgage calculator to help you!
As always we’re here to help you make these decisions and help you analyze opportunities with full knowledge of what goes on behind the scenes. Feel free to email or call anytime!
