I’m sure you’ve seen the ads… “No Cost Mortgage!” No closing costs, no appraisal fee, no this, no that. Free Money! Don’t be fooled. There are always costs associated with originating a mortgage...

And for the vast majority of situations, you as the borrower are paying for it. You may just not know how. Here is an explanation of what you’re paying for, why and how. This is the true cost of your mortgage.

If you are purchasing or refinancing with conventional financing, your mortgage will require specific insurances and assurances in order to be saleable. What do you mean, saleable? Let’s say that you originate your mortgage with Bank of Timbuktu (BofT). Once your loan is completed, BofT packages up your mortgage and sells it to investors (the Secondary Market a.k.a. Wall Street). Even though you still make your monthly payments to BofT, when they receive your check, they pass along your money on to its rightful owner and keep a small portion for themselves for the cost of collecting your payment (called Servicing). BofT is not going to give you the mortgage unless they know that they will be able to sell it on the secondary market.

Here are some typical examples of the required items to make sure your loan is saleable. They are usually provided by professionals and companies other than your lender:

• Title insurance – This is often the lion’s share of the total cost on a purchase or refinance. Title insurance fees are regulated by the California Insurance Commissioner and are generally not negotiable (nor do you see much if any variance from one Title Company to another).
• Escrow fee – In Northern California, it is customary for escrow to be at the same company from which you get your title insurance. This is the fee paid for the person/company that will act as an impartial 3rd party in collecting all of the money, documents and instructions from the various parties to the transaction (buyer, seller, real estate agent, lender, insurance, etc.). Then they execute on the instructions by recording deeds, dispersing money, issuing insurance, and so forth.
• Appraisal – Most appraisals are conducted by an independent appraiser (as opposed to a staff appraiser that works for the lender). Especially in the current mortgage market, it is a necessity to have an opinion of value for the property that is issued by a licensed appraiser and meets the specified standards for an appraisal.

There are other fees that are customarily charged by lenders or other parties participating in the transaction. Purchase transactions are more costly than refinances since there are more services being provided.

“But,” you say, “how can a lender say they have a ‘No Cost Mortgage’”? At best they are saying they will pay for the costs on your behalf. There will be title insurance. There will be an escrow. They will have some expense in determining the value of your home. They have to make sure your loan is saleable in the secondary market, which is where mortgage banks and brokers sell their loans to the large banks and financial institutions. So if these costs exist, are these lenders just paying for them and earning less on the mortgage? To some extent, that may be possible. But it’s not likely. It’s more likely that they are simply making up for the cost in another way.

Many lenders think of mortgages as a commodity. They buy low and sell high in order to make a profit. Your lender is “buying” by creating your mortgage at one price (generally reflected in the loan’s interest rate) and then “selling” it to the investment community at another higher rate, with the lender keeping the difference. Without getting too far down in the weeds regarding the secondary mortgage market, if the lender is going to pay for the expense of creating your mortgage, they can simply increase the price they will be able to sell your loan by increasing your interest rate. So tell me, who do you think is paying for your “No Cost Mortgage”? You are.

Jeff Smith has been helping families in the Marin community for more than 17 years. As a trusted financial advisor and mortgage advisor, Jeff helps his clients make better financial decisions to improve the outcomes of the financial choices in life.