What's the real scoop on lenders advertising no closing costs refinances?

Have you heard these advertisements... mortgage broker's claiming "we make enough money on interest during the life of the loan" and "why should we stick it to borrowers and make them pay closing costs".

What's really going on here? Do you really think the state isn't going to look for their taxes (stamps on the note and mortgage)? How can some lenders operate in a high fee state like Florida and effect a no closing cost loan? The answer is...THEY CAN'T!

Closing costs on refinances average about 2% of the loan amount. This is primarily your state taxes and your new title policy and title closing fees. In addition the lender will usually charge a minimum fee for processing and underwriting.

There is no magic here. These brokers are merely paying the closing costs for the borrower out of the proceeds of the mortgage in the form of a yield spread. Simply put, the higher the rate they charge the borrower, the more the lender will pay the mortgage broker. For example, If a broker prices a 30 year fixed mortgage to pay back 4%, he or she can pay the closing costs and still make 2% on the loan.

It's not necessarily a bad deal for the borrower provided the lender is lowering the interest rate. Most of the time, however, the borrower would be better off with that 2% being rolled into the loan in the form of additional principal and enjoy a lower interest rate and payment.