Surely you’ve seen or heard the ads on television or the internet. Ads from banks that offer “no closing cost” loans. But why doesn’t your mortgage company offer them and how can a bank offer a no closing cost loan and still be competitive withno closing cost loans other lenders? There are a couple of considerations when evaluating such a claim, the first is in regards to who charges what.

 

Any lender offering credit is required to provide details of the loan along with the annual percentage rate, or APR. That’s why you’ll often see an “*” in most interest rate advertisements. There’s some fine print involved. In the fine print, a bank has the opportunity to further explain their offering. Especially in light of closing costs.

When a lender advertises a low, or no closing cost loan, the lender may either refer to their own fees or all possible fees. There’s a big difference between no “lender” fees compared to no fees whatsoever. Just look at your last settlement statement for proof of that. When a lender advertises “no closing costs” make sure you’re clear on which costs the bank is referring to.

The next consideration is how one lender can offer a no closing cost loan and another cannot. The fact is that any lender can offer a no closing cost loan and all that is needed is an adjustment in the interest rate. You know that you can pay a discount point, or one percent of the loan amount, to a mortgage company and get a lower rate, right?

In a similar manner, your lender can increase your mortgage rate and provide you with a lender credit to be applied to your closing costs. Your rate is slightly higher but you don’t have to come to the closing with a few thousand dollars for closing costs. Ask your lender for the various rate/credit combinations. There really is no such thing as a “no closing cost” loan—in reality, the cost is in the higher rate, paid over time.