No Closing Cost Mortgage: How It Really Works

Although it is a very common industry term, we all know there is no such thing as a “no closing cost” mortgage.  Various services are provided by those involved in the transaction and they charge a fee for their efforts. What “no closing costs” really mean is that the costs will be paid by the lender, directly or indirectly, not by the borrower.  We generally call those dollars from the lender a “rebate”. The interest rate will be higher in exchange for the rebate.  This is the tradeoff and the borrower should be given the choice as to how much of the closing costs he/she wants paid by the rebate – all, none or some.

In my discussion of closing costs, I am excluding the roughly $150 fee for the mandatory counseling completed BEFORE the loan application can be signed.  That fee cannot be paid by the lender or loan officer.

As explained below, rather than keep the excess “rebate”, DS Consulting uses it to pay the borrower’s closing costs, usually resulting in a “no closing cost reverse mortgage”.

To put this perspective, let’s first estimate closing costs by category.  Understand that these are normal and customary charges and anyone that says otherwise is likely coloring the truth for their benefit:

Lender’s fees                                     $200-$1000                        varies by lender

Third-party fees                                $2000-$3000                   appraisal, escrow, title insurance, etc.

Upfront mortgage insurance       $1500-$15,000                either .5% or 2.5% of the appraisal

Loan officer compensation           $5000-$40,000                total of rebate & loan origination fee

As you can see, there can be a huge swing in the total closing costs and it primarily depends on the greed of the loan officer/company and the upfront mortgage insurance.  In almost every case, the transaction can be structured where all or most of the closing costs are paid by the lender if the loan officer is charging a reasonable fee. 

This is worth repeating. There is a range of interest rate the loan officer can charge the borrower.  The higher the rate, the higher the “rebate”. The “rebate” is money paid to the loan officer or company by the investor for charging a higher interest rate An higher rate results in additional interest being added to the borrower’s loan every month for the life of the loan.

****IMPORTANT FACT ****

A BANK DOES NOT HAVE TO DISCLOSE THE REBATE TO THE BORROWER

(This allows the loan officer/bank to earn an excessive commission without informing the borrower)

 The rebate can be as much at 15% of the loan, so a $200,000 loan could have $30,000 rebate going to an unethical loan officer, which is often hidden from the borrower.  In addition, FHA allows the borrower to be charged a loan origination fee (or commission) of as much as $6,000.

 We provide a chart that shows the rebate for each possible interest rate and the estimated closing costs so the borrower can decide on the rate & how much of the closing costs will be paid by the rebate.  Often it makes financial sense to pay a little higher rate and have the closing costs paid with the rebate, but not always.  This decision should be made by the borrower with the assistance of the loan officer.

 We fully disclosure our estimated closing costs, including our fee, for the borrower’s review & approval before any documents are signed.  Although our fee is usual less than half of the big guys when you included their rebate, it still merits discussion.

Like any other service or product you purchase, you have a right to know the fee for the service so you can decide if it is reasonable and acceptable.

Use the short form below for your free, personalized calculation showing how we pay your closing costs!