Bank of America Introduces No Fee Mortgage
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Yesterday, Bank of America introduced its no-fee mortgage program. According to their website, the new program No Fee Mortgage PLUS, which is available to home-buyers nationwide, includes the following features:
- No Application Fee
- No Closing Fees
- No Private Mortgage Insurance Required
- Close-On-Time Guarantee
- Best Value Guarantee
According to a CNNMoney report yesterday, BoA also “won’t charge for private mortgage insurance - often required for borrowers who put less than 20 percent down.” However, the no-fee program is only applicable to buying a home, not refinancing.
While it’s good to have a loan without all the fees, they have to be put in the context of the overall costs of buying a home and the dominant factor is not the fees, but the interest rate of the loan. So how does BoA’s rate compare with its rivals? I run a quick check on Bankrate.com and found that for a $250K loan, the rate of 30-year fixed mortgage from BoA, currently at 6.625%, is in fact the highest dozens of banks offering the same product in the area close to where we live. The lowest rate is 5.375% from VirtualBank. That works out about $200 difference in monthly mortgage payment! During the lifetime of the loan, the total interests for the BoA loan is $326,279.86 while the interests for VirtualBank loan is $253,974.11. Can the savings on fees offset the $72,306 more on interests?
I don’t see BoA become my first of choice of mortgage products, unless their rates are really competitive. Fee isn’t the only factor to consider when shopping for a mortgage.
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People should also considder this: If your rate is high, don’t think you can just take one of these no fee mortgages untill you find a better rate. One additional condition is that they tent to have early payoff penalties. For some, a refi in the first 2 years causes a penalty of 2-3% of the mortgage balance. So either you keep the mortgage and pay the fees in an increased rate, or you refi and pay a big penalty.
So either way, you WILL end up paying the fees in no-fee mortgages.
Though I think no-fee mortgage the idea itself is very appealing, BoA doesn’t have the record of offering very competitive rate. They are usually in the top tier. I see this offer similar to their $0 commission trading: the idea is good, but the bar is too high ($25K deposit with them at a very low rate). For mortgage, I think rate is the most important factor. If BoA’s rate is alway 1% higher than others, I don’t see why people want to use them. Of course, people may feel safer to deal like a large bank than a small player.
I agree, this doesn’t excite me too much. BofA’s rates are way too high relative to what others can offer.
A cheaper alternative to bank mortgage insurance is to use a term life insurance policy. Term life also offers the advantage of being able to name the beneficiary, as well as the option of choosing a term life policy that converts into whole life insurance at the end of the term without having to reapply for coverage. Consult with a licensed broker as well as comparing quotes online. It’s important to remember that bank mortgage insurance is intended to protect the bank should something happen to you; term life insurance protects your interests.