Home Mortgage Advertisers Lie…Especially About Closing Costs

Mortgage companies who advertise on radio and TV about “no closing costs” or “$395 flat fee” are simply lying.

I know for many of you hearing an untruthful advertisement is no great threat, but for the proverbial little old lady or an unsuspecting first time buyer it truly is. I think with 2 trillion dollars in adjustable loans set to adjust over the next 24 months, you got hoodwinked by false advertising more than we’d all care to admit.

So, read this carefully and learn to protect yourself from false, incomplete, or misleading mortgage advertising. Not doing so can cost you $10,000, $30,000 or even $80,000 over your mortgage paying lifetime.

Let’s get rolling…

Every time I turn on the radio or TV, $395 Flat Fee or a No Cost mortgage offers spew out without fail. Yes, I’m talking about the Ditech TV commercials airing non-stop over the last 7 years forcing the $395 Flat Fee loan down our throats. This is a perfect example of a deceptive ad. But the one that really gets my goat, is the Lenox Financial radio ads 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 outrageous example of false mortgage advertising is the impression by the No Cost mortgage companies that a “free” loan is possible due to “high volume”.

Now, that’s the biggest whopper of them all!

The truth is mortgage companies pay your closing costs with the kickback called Yield Spread Premium. Yield Spread Premium is generated only by charging you a much higher rate than you deserve. This type of income is called Yield Spread Premium, YSP, overage, rebate, or back-end points. This amounts to a ton of money, the Lenox ad is truthful on that point. 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), they are not required by law to disclose the extra profit they receive due to the higher interest rate. But believe me YOU WILL PAY for all those closing costs AGAIN AND AGAIN over the life of the loan in the form of higher monthly payments. They bury the fact you could get a lower rate by paying the costs in the super-fast-talking legal statement at the end of their ad.

You tell me, with these hidden profits generated only by increased rates who is the crook?

So these deceptive ads should signal you the rate you’ll get is not just inflated, but super inflated. Since even on loans where the consumer pays the costs at closing, the rate is inflated for extra profit. The normal Yield Spread Premium equals one half percent (0.5%) higher for you and 2% of your loan amount or thousands of extra kickback dollars for the company. No Cost and Flat Fee companies plan on raising the rate not the “normal” 0.5%, but by an extra amount to cover all the third party closing costs as well. This super increased rate will add another .5% for a total of 1% above what you deserved.

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. With a $200,000.00 mortgage, they earn $10,000 meanwhile sending the message to the borrower it’s all done FREE! 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. It’s time to police our own industry by speaking out against these 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 directly, “So tell me, how much YSP are you trying to make? Do you ever quote and close loans without YSP? How much of that YSP is used to cover my actual costs? How much YSP goes to you and your company?”

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 having the closing costs paid by YSP because you are moving soon 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!

Author: Rob K. Blake
Published July 15, 2007