"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-Bank of America, really offer people a home loan with no closing costs?
Once the initial publicity subsided, the reality of the bank's offer became clear:
· It would pay some, but not all, of the closing costs involved when you purchase a home.
· And you would pay a higher interest rate - among the highest on the market.
It is something other mortgage lenders have been doing for years: Waiving certain one-time costs for borrowers while recouping those expenses with higher interest rates.
High-volume residential lenders such as Countrywide and E-Loan, for example, have long offered
"no-cost" home loans, with accompanying higher 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 homebuyers may see an increasing number of no-fee 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 nation's housing markets are in the doldrums, the bank says its home-loan applications are up 40% from a year ago, while 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 scoop on Bank of America's no-fee deal, according to Francisco:
- No appraisal fee or title-insurance charges, unless the borrowers choose to purchase a policy for themselves as well as for the lender.
- 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% of the purchase price.
- 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 lender.
Even a no-fee deal, however, has some closing costs, mostly related to taxes and the escrow fund to cover the dwelling's insurance premium.
On a $250,000 home in Florida:
· The state tangibles tax is $500
· Documentation stamps on the mortgage would cost $875.
While a no-fee mortgage can save you thousands in upfront costs, you're likely to pay a higher interest rate as a result.
Bank of America's 30-year, fixed-rate, "no fee" mortgage loan for customers with good credit, for example, was 6.8% on May 23, according to Bankrate.com, the consumer-finance research site. The market average that day was 6.3%, and some lenders were offering rates as low as 5.8%.
On a $250,000 mortgage, a customer's monthly payment would have been about $82 more with the Bank of America no-fee deal - or nearly $30,000 over the life of the loan - compared with a loan based on the 6.3% market average.
Few people, however, stay in a home that long. If you expect to keep a house for only a few years, you still might want to consider loans that waive most of the upfront fees - if you can afford the higher monthly payment.
"I've heard about Bank of America's deal, and it sounds basically like a good one," said Jim Gudinas, a Lake Mary resident and retired lobbyist for AAA. "But in any deals like that, it's a case of pay now or pay later."
Francisco, the Bank of America spokesman, disputed the notion that the bank was recapturing lost fees by boosting the interest rate on its no-fee mortgages.
"We don't roll fees into the interest rate," Francisco said. "We feel our rates are very competitive, but we're not the lowest out there. And that was true before this program started. But we believe we offer more convenience and other advantages to customers than other lenders, even if their rates are lower."
But that explanation skirts the question of why Bank of America's mortgage rates were higher than its competitors in the first place, said Weaver, the UCF professor." That simply says to me they were overcharging you before," he said. "Now they're overcharging you a little less."
The more-likely explanation is that the bank realized it needed to be more competitive in the mortgage-loan business, even if it meant giving up some fee income, Weaver said.
Despite being the nation's largest retail bank, Bank of America trails Wells Fargo, Countrywide, Washington Mutual and several others in terms of the amount of residential lending it does, he said.
Florida Realtors.org
Copyright © 2007 The Orlando Sentinel, Richard Burnet abridged by Lois Szydlowski
ORLANDO, Fla. - May 30, 2007