Mortgage Girl

What a great deal, where can I get a hundred of these? There are a lot of lenders currently offering zero point zero fee deals in order to get their phones to ring.

I don’t mind the offer as much as I do mind the lies that come with the advertising. Some lenders actually say that companies charging loan fees are predatory, which isn't really true. Yes, some do overcharge on fees. These advertisers also say "we make enough money on the interest of the loan that we don't need to charge fees". To a lay person that makes perfect sense. The reality is that most mortgage companies don't make their money off of interest earned during the life of the loan. Most loans are sold to the secondary investor market and it's usually the final investor that makes the interest. Mortgage companies most often make their money on fees earned when they originate the loan, rarely on the interest earned over the life of the loan.

" Buyer beware" because the offer sounds good in a 30 second commercial spot. Allow me to explain what a zero point zero fee deal is and how it works. First though, I have to ask: Is the loan zero origination points and discount points? Is it free of lender fees or are all fees included – lender, title and closing fees?

Depending on which lender you speak to and how much they are exaggerating the offer, the deal can mean anything. The beauty of this offer for the mortgage company is that it makes the person hearing the enticement think they just found the best deal on earth. Any lender can offer this type of fee structure, most choose not to because these loans are a come-on and usually impractical.

When borrowers call in on these types of loan offers, which is the number one reason for offering them in the first place, to get people to call, they find that the rate is so high, that paying fees and points is the only way to get a rate that makes sense, with a payment that is affordable.
It all works like this: The lender offers a zero point zero fee deal, the buyer calls in to "catch" the offer, and after taking a long application the lender makes a quote. It's usually a rate the borrower will not take, but at least now the mortgage company has an application and a live body on the phone.

These types of loans have worked well in the past when rates were dropping fast and people were carrying interest rates above eight percent. Most borrowers today, unless they need cash, have an adjustable or Subprime loan, are doing pretty well.

Typically, the zero point zero fee quote consists of a rate high enough that the eventual investor on Wall Street will pay the lender a large "premium" to the mortgage company. A large enough of a premium, that the mortgage company can make a decent profit, while being able to pay for the borrowers closing costs. It's the high premium rebate offered by the secondary investor markets that make this deal possible. Premiums are offered on mortgages with above market interest rates. An above market rate is palatable if the borrower is going from 9% to 6.5%.

Example: Say I was a Subprime borrower in 2007, my credit score has gone up over the last twelve months or so, and now I qualify for a conventional loan, I might benefit. The spread between Subprime and a conventional loan is usually two to three percent at any given time. If you find that you can do a zero point/zero fee loan and lower your rate by two percent or $200 a month, then it works. If not, and you want a lower payment as most people do, then paying points and fees will likely be what you end up doing.

Paying points and fees aren’t a bad thing if you plan on keeping the home and can offset the fees over time with a lower payment. Zero points and fees may also be beneficial if the rate decrease is large enough and the idea of not increasing your loan amount makes sense. Remember, fees financed will have a compounded cost effect over thirty years of amortization.

Look at the math from a couple of angles and work with an ethical loan consultant to find the right solutions.