Tuesday, May 22, 2007

A Loan With No Closing Costs?

Lenders are definitely under the gun right now. With all the hoopla about sub prime loans and who did what to who... we will see some changes in how mainstream lenders are doing business as they try to regain the trust of the public.

No matter how silly Banks may appear to be they are not entirely stupid.. even in the wake of heavy foreclosure activity in many areas they are counting on people buying those properties.. and they are right. It would be suicide for them to offer loan products that are similar to the ones now being disparaged so there will be new twists in the game..

That said..Bank of America is offering a new loan to entice borrowers back.. A No Closing Cost Loan which they swear is not covered by higher interest rates. These loans will be held in-house.. meaning they will not package them to sell to the secondary market. Currently the loan is only available for purchase money loans ( buying a property) not for refinancing. They are stating that they hope to make up what they are losing in typical closing cost fees by increases in the volume of new loans. In addition to no closing costs they are also not going to require PMI or impound accounts and the loan ratios are 95% loan to value.

I'm guessing that the requirements will be fairly tough and will require full documentation and high credit scores... in other words limited to the bank's best customers.. and there is nothing wrong with that.. if you are financially sound there should be some perk.

Currently the whole closing cost structure is a joke with lots of garbage fees thrown in for no reason.. My favorite is document preparation.. Back in the old days someone really did have to type up each document but today they just throw a name into the computer and .. presto.. with the click of a mouse the entire doc is prepared.. I can see where a $50 service fee might be OK but $200-$500 seems a bit excessive.

What will be interesting is to see if the idea catches on with other major lenders. Even if the whole closing cost fee structure is not deleted it would be a good thing if it finally got regulated with standard fees that all lenders use so the consumer could really compare loans from lender to lender.

6:00 pm update:

I ran the No Cost Loan from Bank of America by one of the local Manhattan Beach lenders that I highly recommend..

Here are some thoughts from Tony Drockton of Branded Mortgage who is a direct lender.

Bank of America offers no fees... but they only refer to bank fees and the appraisal....

I think your blog is 'spot on' (pun intended) they are only really waiving about $1000 in fees of which as you state are mainly junk fees anyway. The misleading part is that people still have to pay all the larger fees of title, escrow and such...but they don't really do a good job of explaining that portion. When you listen to the advertisement, if you are not real estate savvy, it appears you will pay nothing at all to buy a home......

There is no free lunch with anything that is NO COST or FREE. I believe in avoiding costs for clients in many situations, but I always want them to understand that banks or brokers only get paid by either charging fees or getting a rebate from the loan. The higher the interest rate, the more rebate, the less costs the borrower needs to pay (if any) up front..i.e. closing costs. As long as the borrower understands this relationship, then it is acceptable to provide the no cost option to them.

It will be very interesting to see how this new loan actually works .. My suspicions are that Tony is right on the money.. there is no free lunch and I have never seen free money from a bank.

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