So that they might succeed in a tough market, a number of mortgage companies are currently promoting so-called "no fee" home financing. According to advertising from a number of loan companies, you can apply for a home loan where you only pay interest; there are no additional costs when you close. Can you actually save money with a no fee mortgage?

As is often the case with this sort of advertising, the answer is "perhaps, or perhaps not." A mortgage company isn't going to just stop charging fees that can add up to nearly 3%-5% of the loan amount. Any company that simply eliminated a source of revenue would quickly go broke, as those fees contribute to their profits.

How do no fee mortgages work? Their income has to originate somewhere; it's going to come from raising the price to borrow the money. The mortgage company will charge you a higher interest rate than a mortgage company that charges closing costs will. That's not necessarily bad; it just means that they are earning their money differently. The company may make some extra money by selling your mortgage to another mortgage company later. The higher rate of interest might make the loan more attractive to buyers on the secondary market.

What does this mean for you, the consumer? As with all mortgages or anything else that you buy of value, you need to shop around before settling on a lender. The only way to see who may be advertising a bargain is to compare the costs of all the loans and do the math. Only when you examine the total cost, including how much money you will pay by the time the mortgage is paid off, will you be able to see who is providing the lowest cost. Each mortgage company is going to have different ways of making their profits; some will charge higher rates, others will charge higher costs at closing.

Is the offer a financial scam? No, but it might be somewhat misleading. The loan companies, through their advertising, would like you to think that you are getting a bargain, as suggesting that there are no closing costs might make you think that you are paying less money. You aren't actually paying less money, but it makes for good advertising. Smart buyers are usually cautious when an advertisement seems too good to be true. Anytime you consider applying for a loan or mortgage, you should assess all of the estimates from all of the mortgage companies you talk to in order to find the mortgage that best meets your needs.