By: Rob Blake

No Closing Cost and Flat Fee mortgage advertising in a word is a rip-off. So much so that California regulators outlawed the use of the phase in all mortgage advertising in their state. All state mortgage regulators should immediately adopted the same restriction if they truely want to protect mortgage consumers.

Until then, the rest of the country is fair game. That means you! Read this carefully and learn to protect yourself. Not doing so can cost you $20,000, $50,000 or even $100,000 over your mortgage paying lifetime.

Let's get started...

Living in Denver where this advertising is still legal, everytime I turn on the TV or the radio, I see or hear a mortgage ad touting a $395 Flat Fee loan or a No Cost loan. Of course we've all seen the Ditech cable TV commercials non-stop over the last 5 years stuffing the $395 Flat Fee loan down our throats. This is a prime example of a deceptive ad. But the one that really chaps my hide, is the Lenox Financial radio spots for No Cost loans that says,

"Come in with a $300,000 loan, and you can leave with a $300,000 loan. We make plenty of money. We don't need to charge you any fees. Don't be fooled by those predators who want to take your money. It's the biggest no-brainer in the history of Earth." or words to that effect.

Yea, no-brainer is right...you'd have to have no brain to believe this garbage.

I visited their website and lie continues,

"The way it works is simple. Our company has created such a high volume through our investors that they are willing to pay us more for your loan than any other brokerage firm. This is typically enough money that we can pay your closing costs and still have money left over for our company as well!"

This is the most egregious example of false, deceptive, and misleading advertising ever allowed to exist in our country. The impression conveyed by the outright false advertising, is that a "free" loan is possible due to "high volume". Nothing could be further from the truth.

The truth is mortgage companies don't "waive" or "cover" closing costs. They "offset" them with the kickback income they get from charging you a much higher rate than you qualify for. This is called Yield Spread Premium overcharging. The lender pays the mortgage company lots of money, that part of the ad is true. Of course, the reason why is where the deception comes in.

The ONLY WAY that company will pay your fees is if they charge a higher than market interest rate, getting a rebate or kickback from the lender for doing so. If they are a correspondent lender or a bank (like Lenox Financial and Ditech), you will never see the lender kickback money they are paid. But due to the higher interest rate they charge, YOU WILL PAY for all those closing costs AGAIN AND AGAIN over the life of the loan in the form of higher monthly payments. In the super-fast-talking legal statement at the end of their ad, it states that you can receive a lower Annual Percentage Rate by paying fees. Oh, really?

You tell me, with double-talk and half truths so flagrant as to make a politician blush, who is the REAL predator here?

So Flat Fee or a No Cost loan ads should signal you the rate you'll get is not just inflated, but "hyper" inflated. Since even on loans where the consumer pays the costs at closing, the rate is inflated for extra profit. This typical Yield Spread Premium overcharging amounts to .5% higher for you and thousands of extra dollars for the company. With the No Cost or Flat Fee companies, they plan on raising the rate not the typical .5% to insure their profit, but an additional amount to cover all the actual third party closing costs as well. This hyper rate inflation could add another .5% or more to the rate you could have reasonably expected.

Another ugly truth behind the hype about the No Cost or Flat Fee transaction is the mortgage company makes as much as 5 percent of the loan amount as a rebate from the lender, and in many cases, it is not disclosed to the borrower. On a $200,000.00 mortgage, they could conceivably earn $10,000.00 while giving the impression that they are doing the loan for nothing. Sure the company covers all the third party closing costs of say $4,000 and pockets $6,000 pure profit. And of course, you are stuck making a payment on a hyper-inflated rate...probably close to a full interest point above the rate you qualified for.

As a 15 year mortgage veteran who knows how money is made in the mortgage business, those advertisements are upsetting to me. Why? Because they give the impression that they are looking out for you, the consumer, and they are working for free when they are actually working against you making huge undisclosed profits. This kind of deceptive advertising used by virtually every bank and broker in America is, in my opinion, the reason consumers don't have any faith in mortgage industry professionals anymore. This is bad for all good mortgage professionals. We've seen our industry go the away of used car and aluminum siding sales. It's time to clean up our own backyard starting with these unethical companies.

Everyone who works on your loan is going to get paid by you at closing by one of three ways: 1) either by a one-time fee listed on your settlement statement, or 2) by the lender rebate created by charging you a higher interest rate, or 3) a combination of the two. Don't believe the hype. As in all things, if it sounds too good to be true it probably is. Beware of what you are signing. Read all the fine print (and there is a lot of it.) Ask questions of your loan originator. Ask point blank, "I know no one works for free. So tell me, how much lender rebate will you get at that rate? How much of that lender rebate will go toward my actual closings costs? How much lender rebate will you and your company get?"

Decide for yourself the most important consideration with your new mortgage. Is it keeping the payment affordable? If so, you'll want to pay the costs as one-time fees and maybe even pay discount points to buy down the interest rate. Is it getting the costs paid by lender rebate because you are planning to move in a couple of years and you can afford the higher payment? But YOU should be in the driver's seat and make those decisions from a position of knowledge. All mortgage brokers can provide a mortgage with either you paying the closing costs as one-time fees or the lender rebate paying the costs and you paying a higher monthly payment.

Remember this: You Always Pay the Costs for Every Mortgage...you and nobody else. The only thing to determine is how. The purpose of this article is to help you understand your options when it comes to paying those costs. Also, I hope this helps you separate the honest from the dishonest which is just as important in your search for the right mortgage company and the right home loan.

Good Luck!