NO CLOSING COST REFINANCING

Have you heard the radio ads that Arizona mortgage companies run about “no cost” loans? If you are considering one of these loan programs, know that nothing is “free“. These mortgage companies are in the business to make money and there are ways to set up your financing that incorporate “cost” without your knowledge.

The first way is to pay in the closing fees. This would be points or “origination fees”. These typically are 1-3% of the loan amount. There will also be other loan fees which would include lender fees, underwriting fees, title fees, broker fees, etc.

The other way that these fees are piled into your loan is through the interest rate. For example, you might qualify for a loan rate of 7% at “par“ pricing. The Loan Officer pads the rate and runs the loan at 7.75%. The lender pays the Arizona mortgage companies yield spread based on the fact that you were charged a higher rate. This can be thousands of dollars and would allow the Loan Officer the ability to waive all cost up “front” and still make a profit on the “back” of the loan.

Here is a loan scenario. You want to complete an Arizona refinance at $300,000 with a local mortgage broker. The Loan Officer is going to charge you a 1% origination fee, which earns him or her $3,000 on the front. The Loan Officer typically does not get paid the other fees, which might include title, recording, doc prep, underwriting, prepaid items, etc. It is still a cost to the borrower. The totals come out to $7500, which is roughly 2.5% of the loan amount. Typically, this would all be pulled from the loan proceeds. The only out of pocket expense is the appraisal fee.

The lender qualifies the loan with a “par” rate of 6%. However, the Loan Officer will make an additional 3% on the back of the loan if they can sell you a rate of 7.5%. In this case, the lender would pay an additional $9,000 in yield spread on top of the $3,000 in origination. That comes out to a total payout of $12,000 to the Loan Officer.

The yield spread payout of $9,000 allows the Loan Officer to eat a portion or all of the closing costs, while still pulling in a substantial profit. This is how companies can advertise “free” and “no cost” loans while still earning a paycheck on the financing of the transaction.