Zero-Cost loans can be tasty: But there's no free lunch

Posted by  on Apr 21, 2009

What does it mean when a lender claims he or she is ..absorbing the mortgage costs"? Well, it looks like because your good faith estimate (GFE) that shows a bunch of fees, then it shows the lender reversing or paying the fees. But there's no free lunch!

If you really think the lender is absorbing your fees out of the goodness of its heart (maybe it's run by the Easter Bunny or something), then I have a really nice condo in Miami I'd like to sell you. 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. 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) to pay less interest over the life of the loan.

The easiest way to compare loans is to ask a few lenders for two pricing quotes on the same product One with no lender fees at all (including the "garbage fees" like document drawing or courier fees or processing charges). Then another one with the lender fees wrapped up into one single origination fee--just one percent of the loan amount and no more--and no garbage because that's just there to confuse you. Do that with several lenders and it makes it pretty easy to see who has the best deal. The next step is running those quotes through a mortgage calculator and seeing which has the better APR


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