No Closing Cost Home Loan -- 4 Tips to Know if it's Real or Fake!

When I hear a no closing cost home loan being advertised, I laugh!! Dear reader, stop and think about this. Can such a home loan really exist?

1) Is there really such a loan?

2) What it actually costs to close a loan

3) How you can tell if it's a good deal

4) Where to go to find help

IS THERE REALLY A NO CLOSING COST HOME LOAN?

Now let's address that first topic. Is there really such a loan? Before you answer that question, I want you to think for just a moment. When was the last time you heard an advertisement for a no closing cost home loan?? Did they discuss important things like what your interest rate might be?? Probably not!! Why??

It's simple my friend. If you really think that a no closing cost home loan exists, then is it reasonable to expect that there are no costs involved to close your loan?? You better believe there is. There's no FREE LUNCH in this world and you know it.

Lender's simply increase your interest rate to cover the actual costs to close your loan. Worse yet, since you'll pay this higher rate for the entire time you hold this loan, the lenders make out like a bandit. They more than make up their costs to close your loan by earning a higher interest rate.

SO, WHAT DOES IT COST TO CLOSE A LOAN?

Although the actual costs do vary to close a loan, I'm going to give you a few of the basics so you can understand this subject.

First let's consider the loan originator. Does he/she work for FREE?? No, they want to make money just like you do. Although they may not be the one touting the no closing cost home loan, they certainly use it to trap people into higher interest rate loans.

The loan originator normally gets paid a commission, a percentage of your loan amount. He can charge it up front or bury it in your interest rate. If they sell you a higher interest rate, they make more money and so does the lender.

Then you have underwriting fees, processing fees, title charges, government fees, appraisal costs and more. All of these are what I call third party vendors. They have to be paid for their services.

How do they get paid when you're getting a no closing cost home loan?? You guessed it, by your paying a higher rate of interest.

If the lender is going to be left holding a mortgage note that pays them a higher rate of interest from what the current market is, they have left over what's called a premium or revenue on the loan. They pay the expenses from these funds.

In short, you must know that there's really no such thing as a no closing cost home loan. There are costs involved in closing every loan and the money will come from you, the customer.

They try to make it sound like a good deal for you, but in reality it is not.

HOW CAN I TELL IF I'M GETTING A GOOD DEAL?

Now if you're considering a no closing cost home loan, how can you tell if you're getting a good deal? Again, you must put your thinking hat on. Since you know that there are certain costs to close every loan, you also know these costs are reflected in a higher rate of interest on your mortgage, how can you really know if it's a good deal?

First, you must learn a few terms known in the lending business. The first one is "PAR RATE". By you getting to know what the Par Rate is for your loan product, this is a good place to start.

So what is Par Rate? The par rate is what an interest rate is without any premium or discount pricing. Remember how I spoke about premium left over by charging you a higher interest rate? The money the lender uses to pay the loan originator and other third party costs??

Premium pricing is calculated in basis points or "bps" for short. Just like a dollar has 100 pennies, a mortgage premium of 1% has 100 bps. For example; let's say you have a $100,000 loan amount. Your premium pricing is 101.00 for a 30 year fixed rate at 7.0%. Left over at this pricing would be 100 bps or 1% of your loan in extra premium. This equals $1,000 in this example. So if your pricing was 102, 103 or even 104 I think you get the picture. Every 100 bps equals 1%.

The higher the pricing, the higher the interest rate. You pay for this over time rather than in up front costs.

I'll leave discount pricing for another article since it works in the opposite.

You will need to find out what the current market is trading at to find the real par rate. That's where you will need some help.

WHERE CAN I FIND HELP?

I know that this subject may be just a little bit over your head. Don't worry. I know somebody that can help you.

What you need is to work with an honest person who is up front with you. Someone who will quote you a "PAR RATE". Someone who is not afraid to let you see their money.

Before I tell you who I personally recommend. I want you to realize something. You will never get a loan at the true par rate and get a no closing cost home loan. Like I said earlier. There are costs involved and someone has to pay them. You're the person that will pay.

The lender is in the business of lending money and making a profit. The loan originator has to make an honest living. The third parties to your loan transaction need to be paid and make a profit or else they will be out of business.

So, it all starts with someone who will explain the loan process to you, step by step. They show you that a no closing cost home loan does not really exist. Then they teach you by breaking down all the costs to actually close your loan.

After that, you'll see that if we go at it from the bottom up, rather then the top down, you can get a good deal by paying a lower interest rate.

What you want is a person who will put in writing all the estimated costs. These costs will be added on top of your loan amount. They will be paid by you or the seller in the case of a purchase using seller concessions.

In the long run, if you get a loan at or near the "PAR RATE" you'll have the lowest interest rate available saving you thousands of dollars over time. The no closing cost home loan does have costs and by being willing to pay this in the beginning rather than over time you save money.

Lastly, if you would like to leave No Closing Costs Home Loan and return to our Mortgage Closing Cost main page, click here.

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