Hiding fees in the interest rate… the REAL truth behind ‘no closing cost loans’ and ‘no PMI on down deposits less than 20%’
My old Branch Manager used to tell me, “There’s never a sale on money.” It goes along with the adage, ‘if it’s too good to be true, it probably is.’ I’ve spent many years in this business dispelling false truths that many Loan Officers try to tell their clients. I’ve actually overtaken many of their deals by just telling the truth.
Every loan has closing costs, but many Lenders hide those costs in the form of a higher rate, without telling the client. In addition, any loan where the borrower isn’t putting down 20%, the loan will have PMI - no matter what; if it’s not shown in the estimated monthly payment, it’s truly wrapped into a higher rate. Look, wrapping closing costs or PMI into the rate CAN be a really good strategy, but informing the client upfront how that works and what the trade-offs are is so important. A higher rate over time can really hurt the borrower, in the form of higher interest paid. For example, on a $400,000.00 loan, and an increase of .25% in rate, a client could pay over $5,000.00 more in interest over an estimated seven-year period. If the client isn’t planning on keeping the loan for seven years, wrapping the closing costs into the rate is actually a solid option.
As many know, Private Mortgage Insurance (PMI) is a monthly fee to cover the Lender’s risk of any loan with less than 20% in equity. On Conforming loans, PMI can actually be wiped away from a client’s monthly mortgage payment when the equity reaches 20%, either through paying down the principal balance, or through property appreciation. Paying monthly PMI is advised when the client is putting a down deposit of 10-19%, and when the housing market is forecasted to appreciate over a short period of time. On the flipside, many Lenders will advertise ‘NO PMI’ loans to draw clients into their doors. Unknowingly to the client, Lenders will wrap the monthly cost of the PMI into the client’s higher rate, and cover the monthly PMI cost (which prevents the client from getting their PMI waved later down the road). This is known in the mortgage business as Lender-paid Mortgage Insurance (LPMI). This could be a great alternative if the property won’t likely hit 20% equity for a long period of time. An added benefit is that the client gets to write-off all of the mortgage interest (which includes PMI), whereas, if a client chooses to pay PMI outside their rate, they get to write-off their interest, but they don’t get to write-off their PMI. Bottom line is that borrowers need to know all of their options when choosing the right loan that fits their short and long-term goals.