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You read of No Closing Cost offers all the time. How is this possible? Are lenders doing this out of the good of their heart? The answer to the first question is YES, this is possible. The answer to the second question is NO, the lenders are not doing it for altruistic motives. So if this is the case then how does this work?

How No Closing Cost Loans Work:

The loan broker (or bank officer) will get a commission (YSP) from the mortgage lender. With this commission the loan broker will pay for all the closing costs. Basically the bank or broker will charge a YSP large enough to offset any upfront fees the borrower would have to pay, and still end up with enough money to make a decent commission.

An example would be a broker that charges no points or fees, but makes a YSP of 1.5% (from the wholesale mortgage lender) on a $500,000 loan. The total compensation to the broker is $7,500, and the fees associated with the loan may be $4,000. The borrower won’t have to pay the $4,000 in fees as it will be subtracted from the broker’s YSP of $7,500, still leaving the broker with $3,500 net commission.

It sounds like a good deal, but the rate the borrower ultimately receives will be higher than it would be at par. Even though the rate might be higher than at par, the rate might be lower than the one you currently have and it can save you money on your monthly mortgage payment. Plus it did not cost you any money up front. The borrower needs to way all the factors before deciding on whether a No Cost Loan is right for them.

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