EchoBay Expert: I see these adds online and on TV that promise "no closing cost loans". Do no closing cost mortgage loans really exist or is this false advertising?
Loyal Reader: Nothing in life is free and this is especially true with mortgage loans. While many advertise no closing cost loans, it is rare to find one where this is truly the case. There are several ways a lender can make it appear there are no closing costs.
1. The lender may roll closing costs into the loan amount.
This may be one of the most common ways to hide fees. By advertising no closing costs, they could simply mean that you do not have to pay closing costs out of pocket. Instead the fees will be added to your loan amount and you will pay them over the life of the loan.
2. The lender is classifying only certain fees as "closing costs".
In this case, when the lender says no closing costs, they may be referring to origination fees or points. They may consider appraisal fees, attorney fees, title fees, etc. as a separate fee and not a closing cost. Many times the lender requires an application fee and/or a credit report fee just to process your application. You can check your good faith estimate to determine if you have really found a no closing cost loan.
3. The lender will increase the interest rate.
In some cases, you may find there are no fees when you look at your good faith estimate. However, rest assured your lender is getting their money. Some fees that lenders charge must be paid out to a third party such as attorney fees or title fees. You can bet the lender is not going to pay these fees for you out of the kindness of their heart.
To make up for not collecting these fees, they may increase the interest rate instead. A simple way to find out is to ask your lender what your interest rate will be if you pay traditional closing costs.
A little closer look and you will find that no closing cost loans do not exist but because of careful wording, the lender is not engaging in false advertising either.