The Price of a ‘No-Cost’ Loan……

October 22, 2010
By LYNNLEY BROWNING

HOME buyers concerned about high closing costs in this tight economy might be tempted by a type of loan that requires no cash outlay in exchange for paying a higher interest rate, especially because rates are already at historically low levels.

But these “zero-cost” or “no-cost” financing deals, as they’re known, could end up costing a borrower dearly over time, some mortgage experts warn.

“I’ve always seen them as a marketing ploy,” said Charles S. Light, a branch manager of Odyssey Funding. “If you’re going to be in the loan more than five years, it usually does not make sense.”

Unlike some similar loans, which don’t require an out-of-pocket outlay but tack on the thousands of dollars in closing costs to the balance, zero- and no-cost loans typically add a half percentage point or so to the rate while not increasing the mortgage balance.

The third-party fees — for the appraisal, credit report, title insurance, recording, and, if you use one, mortgage broker — are paid by the lender. The fees, including how much the broker is making on the loan, are disclosed on the closing statement.

But if you bypass a broker and go straight to the lender there is less transparency, because the loan officer doesn’t have to disclose how much the lender is making off the loan.

The math on no-cost loans, which can be used for both purchases and refinancing, and which come in fixed and adjustable rates lasting 3 to 30 years, is simple.

Say you opt for a $300,000 no-cost, fixed-rate loan at 5 percent for 30 years, instead of coughing up $6,000 in closing costs and paying 4.5 percent interest. If that’s your choice, you will have monthly payments of $1,610.

By paying the closing costs up front for the 4.5 percent rate, you recover those costs at 66 months, according to Mr. Light. But you also have a monthly payment of $1,520 — $90 lower than the no-cost option. That adds up to a savings of $32,547 in interest over the life of the loan.

No- or zero-cost loans can seem appealing to residents of New York, who face a mortgage tax of 1.8 percent (around 0.8 percent if they live in the state but outside the city), as well as fees for a bank-hired lawyer.

“People are so tight on cash, it allows people to save out of pocket,” said Thomas Martin, the president of America’s Watchdog, a consumer advocacy group based in Washington.

But Mr. Martin added that buyers should plug in the numbers on an amortization calculator (one is available at www.federalreserve.gov) and compare them with those for a conventional loan. If you plan to refinance a no-cost loan within several years — an option that might make financial sense for some people — make sure you have no prepayment penalty, he added.

Zero-cost loans emerged in the early 1990s and blossomed during the mortgage boom, when they were sold by big banks and lenders alongside no-documentation loans and other subprime products, mainly to lower-income consumers who lacked cash.

TODAY, Mr. Martin said, tighter lending and disclosure requirements make the no-cost option “a totally different animal than five years ago,” with lenders now much stricter about verifying income levels.

Still, some big banks, including Bank of America, no longer make them available.

“We’re focused on offering products that offer complete transparency to the customer,” said Terry Francisco, a spokesman for Bank of America.

Loan-volume numbers are difficult to come by, though other banks, including Wells Fargo, still offer the loans. The Wells Fargo one, called Closing CostSaver, typically runs a half to five-eighths of a percentage point higher than conventional loans and comes in 10- to 30-year terms.

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About Ron Jesser Realtor

I'm All About Real Estate And I Know The Desert! After 14 years of selling, I better!   When selecting a Realtor or real estate agent, a thorough knowledge of the community, strong negotiation skills, and a commitment to excellent service are all skills you’ll want on your side of the table. Experience counts!

 With great experience as a Palm Springs Realtor and extensive knowledge as a Realtor servicing Rancho Mirage, Cathedral City, Palm Desert, La Quinta, and Indio, I help both buyers and sellers meet their real estate objectives. I will work tirelessly on your behalf by being available to you when you need me to answer questions, provide information or ensure our deal is progressing smoothly; by having a solid team ready to take care of any need or request that comes our way and by providing any resource necessary to make your transaction trouble free. Sellers—I am committed to selling your home or property in a timely fashion and at the highest possible price. If you are interested in receiving a free home valuation, I encourage you to fill out my free Home Valuation Form or check out my Dream Home Finder at www.RonJesser.com Buyers—I will work with you to find your ideal home at your ideal price. Let’s narrow down what you are looking for, so we can begin the home showing process and get you a closer look at what these communities have to offer. No matter what it takes, your next home buying or home selling experience will be an enjoyable and successful one because I will be doing the work for you. And by working tirelessly on your behalf, as a team we will make your next home buying or home selling experience an enjoyable and successful one. 
 Remember—I'm not here just to find you a home. I'm here to help you find a life you will love! Thank you for considering me as your Realtor. Please call or email me if you have any real estate questions about Greater Palm Springs. DRE# 01280106
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