As different as night and day!

Defined:

No Cost - No origination fees or discount points AND the broker pays ALL closing costs including the title, appraisal and bank junk fees.  The broker pays all the closing fees out of the Yield Spread Premium (Commission) paid to the broker by the bank. 

No Out of Pocket Expenses - In this transaction, the broker “rolls in” the origination points, discount points and all the title and bank fees.  This loan authorizes the broker to charge the borrower as much as they can for the loan.  Borrowers typically spend 3 or 4 years just paying off the fees. The borrower doesn’t have to cut a check up front, instead they finance them over the term of the loan.

Over the years, we have received thousands of calls from borrowers confused over the difference. Unfortunately, when they hear “no out of pocket” , they assume “no cost”.  Often, they don’t find out the difference until they get to closing. For example, we recieved a call today from a borrower that was promised a decent rate.  When asked how much the loan was costing her, she didn’t know.  Hey, it’s no out of pocket!  It seems absurd to me.  Would you go to a furniture store, pick out a couch, have it delivered to your house, and then ask how much it costs?  Obviously not. 

So, be careful, get a Good Faith Estimate UP FRONT and review your new loan amount.  Find out EXACTLY how much the loan is costing you and make sure it still makes sense.

There is a lot of confusion in the marketplace regarding whether a borrower is better served going to a mortgage broker or going to their bank.  The answer is simple…it depends.

So, the question you need to ask yourself is this, “Do I know which bank is currently offering the lowest rate in the Country?”  If the answer is no, call a mortgage broker or two.  Steve Walsh
The Mortgage Maniac

Watch the talking heads of any financial news network and you can’t help but notice that for every issue there are two sides, and for every prediction, there is one that counters it.  Predictions are really just educated guesses that can change on a dime when unexpected events occur. Don’t fall for their predictions, it can end up costing you thousands. 

-Steve Walsh

Mortgage Maniac

Everyday, I sit in my office and have to watch the new ad campaign that Ditech is running and I wonder… why do they advertise the absolute worse loan that a borrower could take? Do people respond? And it makes me wonder, does Ditech really think “People Are Smart” or are they laughing behind our collective backs and the ad is really meant to be sarcastic.

Here are the details of the loan they offer:

30-Year Fixed Rate at 6.125%, but the costs, turn out to be $12,000. (Example uses $300,000 loan)

No loan professional would EVER take this loan. Here’s why:

In the first year, you have to pay the 6.125% ($18,375) PLUS the $12,000 in costs PLUS unless you wrote a $12,000 check at closing, you owe an additional $735 in interest JUST TO PAY FOR THE CLOSING COSTS. This gives you an APR of nearly 11%. At the end of the 1st year, you will still owe $309,000.

In the second year, you get to average out your costs over 2 years, so your APR drops to 8.5%. The 3rd year 7.60%, the 4th year 7.2%, etc. YOU WILL NEVER SEE THE 6.125% NOTE RATE EVEN IF YOU PAY ON THE LOAN FOR 30 YEARS.

Now, here is the KICKER. You borrowed $312,000 when you only needed to borrow $300,000. It will take you 4 YEARS JUST TO PAY OFF THE $12,000 IN COSTS. YOU WON’T BE PAYING DOWN THE $300,000 UNTIL THE 4TH YEAR INTO THE LOAN. What a great business plan…lend somebody money, and for 4 years, you collect $72,000 in payments AND THE BORROWER HASN’T EVEN BEGUN TO PAY DOWN THE HOUSE. THEY ARE MERELY PAYING YOU BACK FOR THE FEES YOU CHARGED THEM.

EPIPHANY: You can get the same loan, $300,000 ON A NO-COST BASIS for 6.625%. With the lender paying ALL the fees, your 1st payment will go towards paying off your house. By the way, the difference in payment between 6.125% and 6.625% (what did you get for your $12,000) is only *$25/month! Oh, and after 4 years, you will owe $285,000 instead of $300,000. If you decide to move, that’s an extra $15,000 in your pocket.

Don’t let the banks tell you “You are Smart” protect yourself; educate yourself, and Get Smart.

*$300,000 at 6.625% $1,920 (Principle & Interest) Vs. $312,000 at 6.125% $1,895 (Principle & Interest)

-Mortgage Maniac