At first glance, fee free mortgages may seem too good to be true. As the old adage goes, something that seems too good to be true probably is too good to be true. However, if you are a savvy mortgage borrower, there are a number of lenders, credit unions and banks that do offer very competitive mortgage loans with no fees or upfront costs. Although there are no out-of-pocket fees, there are costs involved in originating, servicing and closing a mortgage loan, which the bank will roll into your interest rate or term.
Shopping for the Lowest Interest Rate
When you are shopping for fee free mortgages, you want to find the lowest interest rate possible. However, do be aware that it is critically important to take into consideration both the term and length of your mortgage note. In other words, the interests rates on a mortgage will be much lower for a variable rate mortgage during the beginning of a repayment period.
However, a variable rate mortgage will change after a period of time. When it does, your monthly payment may increase dramatically. When you are evaluating different mortgage lenders’ offers, remember to compare apples-to-apples by making sure the term and length of the mortgage loan offers remains consistent.
Origination Fees and Points
In the case of a fee free mortgage, there will be no origination fees or points to pay upfront. None the less, the true cost of a fee free mortgage can be deceptive. There are always costs involved in originating and closing a mortgage loan, including processing fees, appraisal fees and closing costs. A bank or lender will not give you a mortgage for free. The lender will roll the cost of the mortgage loan into the interest rate and/or term.
The way this is done is to offer a borrower a little higher of an interest rate in order to generate points on the backside. A point is 1% of your mortgage note. The bank will then be paid a fee contingent on the amount of your mortgage loan after the closing. Again, do remember to maintain a consistent term when comparing mortgage loan offers. In this way, you will be sure to receive the most accurate information from prospective mortgage lenders.
Appraisal, Title and Processing Fees
Appraisal, title and processing fees are often fees that are charged to a borrower upfront. In the case of a no fee mortgage, these fees will be rolled into the closing costs and covered by the bank. The way this is done is to give a borrower a higher interest rate, so that the wholesale lender will pay the retail bank a fee for the mortgage loan.
Use this Excel spreadsheet template to work out the true cost of these fees in order to see exactly how much you would be saving with a fee free mortgage.