No-Point, No-Fee Option

QUESTION:

What’s a zero-zero mortgage, and should I get one?

ANSWER:

Zero-zero is the term given to mortgages that would be offered to borrowers under a government proposal to simplify the lending system.

A zero-zero mortgage has no points and no fees. A point is equal to one percent of the mortgage amount, a sum paid at closing. Similarly, a fee is a flat dollar amount that is paid at closing.

When you buy a loan today, you have to consider the interest rate, points and fees associated with the mortgage. It’s common to get a rate-and-points quote, or you can also get a quote without points – that’s called par pricing.

As an example, you might get quotes at 3.5 percent and two points, 3.625 percent and one point and 3.75 percent and no points (the quote at par).

For many borrowers, the higher rate is the best choice because they will pay no points at closing and not own the loan long enough to justify the upfront cost of a point or two.

Still, comparing these rate-and-points quotes can be confusing, so the Consumer Financial Protection Bureau wants lenders to go further and offer mortgage quotes that include both points and fees, if any.

Lenders would be entirely free to offer whatever loans and loan rates they want, but under the CFPB proposal, lenders would also have to offer a “no-point, no-fee loan option,” or what everyone is now calling a zero-zero mortgage quote.

Once borrowers have the zero-zero quote, it then becomes very easy to compare rates between different lenders. This means borrowers – who should always compare mortgage rates – will be able to stack up the offer of one lender against another.

It is sometimes claimed that if the CFPB proposal is finalized in January, that loan rates will somehow rise. In fact, better disclosure will not increase mortgage rates in any meaningful way because the cost of disclosure is pretty much zero – it’s like saying that the cost of groceries is higher because the supermarket must total your bill.

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