So, what's up with all of those commercials that offer "No closing costs mortgage loans"? The commercial sounds good, it has lots of high tech graphics, and it looks to run on every channel at all hours of the day and night. Closing a mortgage loan with no closing costs sounds like the best thing going. But does it really save you any money?
Closing costs are a part of any loan. They cover the cost of providing the loan and closing, and may include:
Title work (making sure there are no outstanding liens against the property),
Origination (packaging the loan and determining the best loan program for the borrower),
Processing (mortgage loans usually generate a lot of paperwork and forms),
Title Company or Closing Attorney (the people who make sure all of the paperwork that you sign is complete and correct),
Appraisal (a third party statement offering an opinion of the value of your property based on sales of similar homes in the area),
It is estimated that from the time you contact your broker or lender until the time you walk out of the final closing, as many as twelve to fifteen people have worked on your loan to complete it. The lender has to generate enough profit from originating and processing your loan to pay for the services of each of these people. This can be accomplished one of two ways.
The most common method is to charge for these services and show the charge as a line item on the HUD-1 form. The HUD-1 form, also called the settlement statement, is a form which each borrower receives at the closing, detailing the costs of the loan. Reading the HUD-1, the borrower is able to exactly determine the cost of each item included in the loan and the loan closing. The closing attorney will explain each item on the form so that the borrower fully understands what they are paying for.
Another method used to cover the costs of closing is a "No Closing Cost" option. In this case, the lender charges the borrower a higher interest rate for the loan and is able to pay for the services out of the extra income generated by the higher loan rate. There are advantages and disadvantages to each method of charging for closing costs. Ask your mortgage broker or mortgage lender to explain which method will benefit you most.