As usual with this sort of advertising, the answer is "maybe, or maybe not." A loan company isn't going to simply drop fees that can add up to as much as 3%-5% of the loan amount. Any company that just did away with a source of revenue would soon go out of business, as those fees are necessary to make a profit.
How do no fee home loans work? The loan company will apply a higher rate of interest than a company that charges closing costs will. Their profit has to come from somewhere; it's going to come from increasing the price to borrow the money. That isn't necessarily bad; it means that they are charging you differently. The increased interest rate may make the loan easier to sell on the secondary market. The lender may make some more cash by selling your home loan to another mortgage company later.
What does this mean for you, the buyer? As with all loans or anything else that you might buy, you need to shop around before settling on a lender. The only way to determine who is providing a good deal is to compare the price of all the lenders and look at the numbers. Each lender is going to have different methods of making their revenue; some will charge higher rates, others will charge more fees at closing. Only when you analyze the total cost, including how much you will pay over the life of the loan, will you be able to see who is offering the lowest cost.
Is the offer a scam? No, but it might be rather misleading. The mortgage companies, through their advertising, want you to believe that you are paying less, since suggesting that there are no closing costs might lead you to believe that you are paying less. You may not be really paying less, but the claims makes successful advertising. Whenever you consider taking out a home loan, you should compare all of the estimates from all of the mortgage companies you talk to in order to find the deal that works best for you. Smart buyers always know to be skeptical when something seems too good to be true.
©Copyright 2007 by Retro Marketing. Charles Essmeier is the owner of Retro Marketing, a firm with a number of informational Websites, including HomeEquityHelp.net, a site with information regarding home equity loans, mortgages and lines of credit.