What Your Mortgage Lender Doesn't Want You to Find Out

by: midry

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Date: Wed, 25 Aug 2010 Time: 4:07 PM - 0 comments

Who would not want to get a little something for absolutely nothing? Anyone loves a good deal. Perhaps this is why the word "free" carries so much force in advertising. Barely a day passes when you don't hear some commercial offering free credit reports or free memberships. Other descriptors such as "no-risk", "no-cost" and ""no-obligation" are equally common.

Unless you've been living in a remote jungle in some far corner of the planet for the past decade you will have heard your share of ads offering no-cost mortgage loans. While it is true that loans with no upfront closing costs exist, such loans are definitely not free when it comes to cost. Here is the reason such loans are not free.

Lenders collect a premium for releasing the servicing rights to a loan. This premium, which is paid by the loan servicer, is called a "Service Release Premium", or just "SRP" for short. The premium amount, which depends on various loan parameters like pre-payment penalty, margin (for adjustable rate mortgages) and interest rate, can vary from a few basis points to several percentage points. A higher interest rate mortgage note, for example, will command a larger SRP than a lower rate note. You lender will adjust your loan terms so that all closing costs paid on your behalf can be recouped with the Service Release Premium. The loan term most likely to be adjusted--not in your favor--is the interest rate. So let us assume all your closing charges will be $3,500 on a $100,000 loan. Your mortgage provider will have to collect 3.5 percent of the mortgage loan amount in S.R.P. to take care of your closing charges. This is traditionally achieved by marking up your rate above the base rate. Thus, that 5.875-percent rate you qualify for? Forget it. You'll find yourself having to pay closer to 6.625 to 6.875 percent by the time your lender marks up your interest rate. The change in total monthly payments on a 5.875-percent loan when compared to a 6.875 note equates to approximately $23,541 over the lifespan of a 30-year mortgage loan.

Thus, as you can see, the "no cost" option is realistically really downright costly in the years to come. In fact, by paying a higher monthly payment you are actually paying for your closing costs on the installment plan. And considering the fact that loan providers aren't obligated to disclose just how much they profit in Service Release Premium this is truly the dirty little secret of the mortgage lending industry. The important thing here is that your no-cost house loan is in actual fact truly pricey over time. No UPFRONT cost would be a better way of describing it. If there's any way you can afford to pay your closing costs outside the loan then you would be well advised to do so. You'll recoup every penny of this in the long run with the money you save.