Loan Programs
The "No Fee" Loan
By Dan Smith

“No Fee” for Me

Many borrowers are amazed by the seemingly endless laundry list of fees they pay at a real estate closing. So the mortgage industry responded a few years ago, with what we call a “No Fee” loan option. This option is available on most programs at virtually every lender. Unfortunately, what many lenders do not explain in their ads is that you will have to take a higher interest rate. The reason for this is actually pretty simple. The fees and costs you see listed don’t disappear by themselves. Instead what happens is that the higher rate being charged creates a “premium” price. This “premium” is akin to negative discount points. In other words, Wall Street is paying money back to the lender in exchange for the higher rate. The lender simple turns around and uses that premium to pay the fees that you didn’t want to pay yourself.
So how do you know whether a “No Fee” loan makes sense for you? You should apply the same logic you do when deciding whether or not to pay points. By that I mean you should determine by comparison the difference paying the fees makes in your monthly payment. Let’s say that by paying $3000 in closing costs, you would have a $50/mo. savings in your payment, compared to the “No Fee” version of the same loan program. By dividing the savings per month, into the cost of getting that saving, you can determine a “break even” point in time. In this example, that would work out to ($3000/50 =) 60 months, or 5 years from now. Then ask yourself honestly whether you plan to stay in this home for that long or not. If you have doubts that you will be there for that long, then the “No Fee” would be the better choice.
In fact, this logic holds true whether refinancing or purchasing a home. Once you decide on a mortgage program, run a few scenarios at various rates and costs. Analyze the break even period for each and make the best decision you can, given the assumptions you made about your length of stay.
If you would like help deciding what loan program and set of costs is right for you, call the professional. Dan Smith can be reached at 303-674-2205. Or visit his web site at www.ColoradoHomeLoans.com anytime!


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