Subscribe

How a No-Cost Reverse Mortgage Works

DS Consulting reverse mortgage process

How Fees and Closing Costs Work

Although it is a very common industry term, we all know there is no such thing as a “no closing cost” mortgage.  Various services are provided by those involved in the transaction and they charge a fee for their efforts. What “no closing costs” really mean is that the costs will be paid by the lender, directly or indirectly, not by the borrower.  We generally call those dollars from the lender a “rebate.” The interest rate will be higher in exchange for the rebate.  This is the tradeoff and the borrower should be given the choice as to how much of the closing costs he/she wants paid by the rebate – all, some or none. Not every option is available with every lender.

With the FHA rule changes effective October, 2017, the loan can drop significantly in exchange for most or all the closing costs being paid by the lender. These new rules make the borrower’s decision much more complicated.

Borrower Choices

Generally, the borrower needs to choose between:

  • A lower interest rate for a higher loan and paying most of the closing costs themselves
  • A higher rate with lower loan and the lender paying most or all the closing costs
  • A rate in the middle resulting in a smaller drop in the loan & some closing costs paid by the lender

The particulars of the transaction will determine the viable options. Most borrowers will want the combination that generates the most available cash.

In this discussion of closing costs, I am excluding the roughly $175 fee for the mandatory counseling completed in the beginning..  This fee cannot be paid by the lender or loan officer.

As explained below, rather than keep any excess “rebate,” DS Consulting uses it to pay the borrower’s closing costs, resulting in reduced or no closing costs paid by the borrower.

To put this perspective, let’s first estimate closing costs by category.  Understand that these are normal and customary charges and anyone that says otherwise is likely coloring the truth for their benefit:

Fee Description Amount Notes
Lender’s fees $200-$1000 Varies by lender
Third-party fees $2000-$3000 Appraisal, escrow, title insurance, etc.
Upfront mortgage insurance $6000-$14,500 2% of the appraisal as of 10/2017
Loan officer compensation $5000-$30,000 Total of rebate kept & fee charged

As you can see, there can be a huge swing in the total closing costs and it primarily depends on the greed of the loan officer/company and the appraised value.  In most cases, the transaction can be structured where most, sometimes all, of the closing costs are paid by the lender if the loan officer is charging a reasonable fee.

There is a range of interest rates the loan officer can charge the borrower.  As mentioned, the higher the rate, the higher the “rebate.” The “rebate” is money paid to the loan officer or company by the investor for charging a higher interest rate.  A higher rate of course results in additional interest being added to the borrower’s loan every month for the life of the loan.

IMPORTANT FACT

A BANK DOES NOT HAVE TO DISCLOSE THE REBATE TO THE BORROWER.

This allows the loan officer/bank to earn an excessive commission without informing the borrower.

The rebate can be as much at 12% of a larger loan, so a $200,000 loan could have $24,000 rebate going to an unethical loan officer or company, which is often hidden from the borrower.  In addition, FHA allows the borrower to be charged a loan origination fee (or commission) of as much as $6,000, depending on the appraised value.

At DS Consulting, we provide a chart that shows the rebate for each possible interest rate and the estimated closing costs. Borrowers can then decide on the rate and how much of the closing costs will be paid by the rebate.  Often it makes financial sense to pay a little higher rate and have the closing costs paid with the rebate, but not always.  This decision should be made by the borrower with the assistance of the loan officer.

We Believe In Full Disclosure

We fully disclose our estimated closing costs, including our fee, for the borrower’s review and approval before any documents are signed.  Although our fee is usual less than half of the big guys when you included their rebate, it still merits discussion. We want you to know exactly what the fee structure is.

Like any other service or product you purchase, you have a right to know the fee for the service so you can decide if it is reasonable and acceptable.

Use the short form on this page for your free, personalized calculation showing how we can pay your closing costs!

Contact Us

DS Consulting
15951 Alta Vista Drive, Unit A
La Mirada, CA 90638
Phone: 562-902-2677

Licensing

Dennis Sanchez
NMLS #281480
BRE #01179128
California CPA #34077 (inactive)
DS Consulting
NMLS #793097
Equal Housing Opportunity

Social Media