No-Fee Mortgages Not Cut and Dry

Joe Nunziata, a Florida mortgage lender, was shaken when he heard that Bank of America was offering home buyers a “no-fee mortgage.”

“No fees. No worry. No, really,” the bank’s ad campaign proclaimed. “Relax, you’ve just found the best mortgage deal.”

Could the nation’s largest retail bank really offer people a home loan with no closing costs? That seemed to be what it was saying, said Nunziata, CEO of FBC Mortgage in Orlando.

“If they were really going to pay every closing cost, that would reshape our entire industry,” he said. “You’d be seeing a lot of ‘Gone Fishing’ signs hanging from mortgage lender doors.”

“It would put people out of business.”

Once the initial publicity subsided, the reality of the mortgage company’s offer became clear: It would pay some, but not all, of the costs involved when you borrowed money to purchase a home.

And you would pay higher mortgage rates.

Among the highest on the market, in fact.

It is something other mortgage lenders have been doing for years: waiving certain one-time costs for borrowers while recouping the expenses with higher mortgage loan rates.

High-volume lenders such as Countrywide Mortgage and E-Loan, for example, have long offered “no-cost” home loans, with accompanying higher mortgage interest rates.

“All Bank of America is doing is emulating what’s been done by many, many other companies - manipulating the interest rate,” said William Weaver, a real-estate professor at the University of Central Florida.

“Consumers have to know there’s no free lunch.”

Still, would-be buyers may see an increasing number of no-fee home mortgage offers and other specials as banks and lenders scramble for market share during the slump in U.S. housing.

Borrowers should shop around, compare the specifics of different offers and read the fine print. Bank of America certainly made a splash earlier this month with the announcement of its no-fee campaign.

At a time when the housing market is in the doldrums, the bank says that its home loan application rates are up 40 percent from a year ago, while its branches and call centers are fielding a steady stream of inquiries.

“The response has been tremendous,” spokesman Terry Francisco said. “We think it’s a very breakthrough product.”

Here’s the long and short of Bank of America’s touted no-fee home loan:

• No administrative, application, underwriting or other lending charges - known in the real-estate industry as “junk fees.”
• No requirement to buy private mortgage insurance, usually required when a buyer’s down payment amounts to less than 20 percent of the price.
• No appraisal fee or title insurance charges, unless the borrowers choose to purchase a policy for themselves as well as for the lender.
• A guarantee that the mortgage will close within 25 days (unless the borrowers request a longer closing period).
• A “walk-away” penalty of only $250 if the customer has been approved for a home loan but later chooses another mortgage lender.

Even a no-fee deal, however, has some closing costs, mostly related to the taxes and the escrow fund to cover the property’s insurance premium.

On a $250,000 home in Florida, for example, the state tangibles tax is $500 and documentation stamps on the mortgage would be $875.

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