MCP Help Blog

What does it mean when a lender claims he or she is “absorbing your mortgage costs”? Or what about an advertisement offering “No Cost” mortgages? Of course, there are costs associated with getting a home loan–a lot of costs. And the lender has to disclose them to you on a form called a Good Faith Estimate (GFE).  So, when a lender claims it is absorbing your costs or “giving” you a “no-cost” loan, you will see a bunch of fees on your GFE. Then, the form shows all these fees being reversed or designated “paid by lender.”

If you really think the lender is absorbing your fees out of the goodness of its heart (maybe it’s run by the Tooth Fairy or something), then I have some really nice abandoned half-built condos in Vegas I’d like to sell you. “Par” is mortgage industry term for the rate you’d pay  if everyone involved in the entire transaction worked for free–there would be just the cost of the money, which changes with financial markets just like stock prices do. And you can get that rate if you want–but you are going to have to pay the costs of originating the mortgage–appraisal, title, lender, etc. fees. And you can get a lower rate than “par” if you want–by paying still more–called “discount” fees or points. But if you don’t want to come in and pay those fees out of pocket, you have two choices.

You don’t have to empty your pockets to pay your costs when you close your loan. You can finance them (roll them into the loan amount),  or you can opt for a no-cost loan.  A recent survey indicated that 85% of borrowers refinancing chose not to pay their fees put of pocket–they either financed them or went with a no-cost option. So it’s a pretty popular choice.  You will pay a higher than the average market par rate if you pay no fees. That’s just business and is not evil unless you think everyone should work for free.

However, this loan may not be in your best interest. Typically, “no-cost” mortgages, with their higher rates, will cost the borrower more in the long run–not the best deal if you are 30 years old and are imagining grandkids visiting you in this house  someday.  So if you plan to keep that home and mortgage more than a few years, you might want to pay the fees (and maybe even a discount point or two, or consider a 15 year mortgage) and spend less on interest over the life of the loan. Mortgage calculators abound and are very helpful in putting this concept into actual payments, and amortization schedules show you how your loan will be paid over time.

The easiest way to compare loans is to ask a few lenders for three rate quotes on the same product. Get one quote with all the fees (excluding property taxes and insurance, which you have to pay whether you have a mortgage or not). Then get a second quote on a “no-cost deal.” Finally, see what your payment would look like if you roll the costs into the mortgage (you only have this option if you are refinancing and there is enough equity in the property). Run the numbers through a mortgage calculator and see how long it would take for the money you saved upfront to be paid back in higher interest charges. And if you have plans for that money you don’t pay upfront (like investing in CD rates paying 3% or whatever) don’t forget to include that in your mortgage decision.

Finally, if you aren’t sure how long you will be in your home, but the rate on a “no-cost” loan is lower than the rate you’re paying now–and you won’t be paying any fees–just pretend you’re a Nike athlete and “just do it.” That decision is a no-brainer.