So I listen to the radio here and there, and even though I only listen occasionally, I still tend to get bombarded with mortgage advertisements.
The latest was from a southern California based company named CashCall, which I believe started as a personal or payday loan lender before jumping into the mortgage game.
Anyways, I noticed in their radio ad that both the mortgage rate and APR were the same, which doesn’t tend to be the case with most mortgages.
Typically, you’ll hear something like, “Get a low, low 4% mortgage rate!,” followed by some fast talking terms and conditions speak that says 4.55% APR or something higher.
So that bit jumped out at me initially. It sounds like a great deal, right? Instead of the usual “bait and switch,” where your mortgage refinance is riddled with fees, you’re actually getting the interest rate they advertise with no fees!
But wait, this must be too good to be true. How can you get a super low rate and pay no fees. The short answer is you can’t. There’s no free lunch, or free mortgage, for that matter.
CashCall “No Closing Costs” Mortgage
CashCall, like many mortgage lenders before them, touts no cost refinance loans as their marquee product.
Put simply, a no cost loan, or in their case, a “No Closing Costs” mortgage, means the borrower doesn’t have to pay for their closing costs….out of pocket.
They still pay for their closing costs, just not all at once at the time of closing. Instead, they’re saddled with a higher than par mortgage rate to make up the difference.
I took a gander at some of CashCall’s mortgage rates and noticed that the “No Closing Costs” loans tend to have interest rates roughly an eighth to a quarter of a percentage point higher.
This premium essentially covers a borrower’s closing costs, including things like the appraisal fee, credit report fee, flood certification fee, tax service fee, notary fee, and title/escrow fees.
So borrowers that elect to take the No Closing Costs option won’t have to pay those fees at closing. However, they’ll wind up with a mortgage rate of say 4.125% instead of 3.99%, or 3.50% instead of 3.25%.
While it may not seem like a lot, that little eighth or quarter point can cost you a pretty penny over the life of the loan.
Let’s look at an example of CashCall’s No Closing Costs mortgage:
Loan amount: $300,000
Loan program: 30-year fixed
Mortgage rate: 3.99%
No Closing Costs rate: 4.125%
If you paid your closing costs out of pocket and took the lower rate, you’d end up with a monthly mortgage payment of $1,430.52, and total interest of $214,987.20 paid over the life of the loan.
If you went with the No Closing Costs rate, you’d have a monthly mortgage payment of $1,453.95, and total interest of $223,422 over 30 years.
As you can see, the monthly payment wouldn’t be all that much different, about $25. But the total interest paid over the life of the loan would be roughly $8,500 more.
So for those who actually keep their mortgage and pay it off over 30 years, they’d be paying more for those closing costs over the life of the loan.
But most borrowers don’t hold onto their home loans for the full mortgage term, either because they sell, refinance, or prepay.
In other words, the savings may not actually be realized if you pay your closing costs upfront. And even if they are, they aren’t all that spectacular, especially with the effects of inflation at play.
The big question is whether the mortgage rate will really only be an eighth of a percent different, or if in reality, it’s closer to a half point different. That’s when it may make a lot more sense to pay your closing cost out of pocket.
The takeaway is that the mortgage rate on a no cost loan will always be higher than a home loan where you pay your closing costs upfront, all else being equal.
Tip: If you take the time to shop around, you may be able to find a no cost loan with a lower interest rate than a mortgage where you must pay your closing costs upfront.
CashCall ‘Do Over Refi’
The company’s latest and greatest mortgage product is its so-called “Do Over Refinance,” which allows owner-occupied borrowers to refinance with CashCall if their loan recently funded elsewhere.
Call it a play on mortgage rates marching lower and lower as time goes on.
By recently funded, I mean within the past 18 months. Borrowers must provide a copy of the mortgage note or statement with the current fixed interest rate, the mortgage term and loan type, then CashCall will offer a lower fixed rate with no closing costs.
Just watch out for that lower rate coming with a shorter mortgage term, such as a 10-year fixed instead of a 15-year of 30-year fixed, as shorter terms will always come with lower rates.
Oh, and the loan must fund within 30 days of application, which isn’t so easy these days. If CashCall can’t hold up their end of the bargain, they’ll pay the borrower $500.
CashCall Jumbo Loans
In May 2013, CashCall began offering super jumbo loans as well, with loan amounts of up to $2 million at a maximum loan-to-value ratio (LTV) of 70% (720 minimum FICO score required), which is certainly pretty aggressive post-mortgage crisis.
If you are able to keep the loan amount at or below $1.5 million, you can push the LTV up to a maximum of 80% with a minimum FICO score of 700. Again, aggressive stuff here.
The rates on their jumbo offerings are pretty competitive as well, with no closing cost options available in the low 4% range for 30-year loans, and the low 3% range for 15-year loans.
If you’re shopping for a jumbo, you may want to consider them alongside other options seeing that very few lenders are in this space at the moment.