Stop worrying and start celebrating,” read the newspaper ad for Bank of America’s No Fee Mortgage Plus, a loan that claims to do away with all application and closing fees. In mid-October, the bank’s Web site was touting a “Best Value Guarantee” and a “No fees. No worries. No, really.” process.

But how much the No Fee Mortgage Plus might save you depends on several factors, including where you live, the interest rate on the mortgage, and how long you expect to keep the loan.
 
The loan, available to customers who have at least one Bank of America account, offers some perks. The bank pledges to close the loan on a selected date or within 25 calendar days of a completed application, whichever is later. If it misses the mark, the bank will cover the principal and interest payment for the first month. Bank of America will also send you $250 if it approves your loan but you close your mortgage with another lender.

The loan’s main selling points, though, are the elimination of closing fees and private mortgage insurance.

Closing costs, which include origination and underwriting expenses, credit scores, third-party title insurance, appraisals, and application fees, can eat up a substantial amount of your cash at closing or add to the amount you borrow. They also vary widely by region. On a $200,000 loan, a New York City resident would pay an average of $3,830 in origination, closing, and title costs, while a resident of Indianapolis would pay $2,339, according to a survey by Bankrate.com. By eliminating those costs, No Fee Mortgage Plus can save you thousands at the close.

The loan also proves its worth over time if you put down less than 20 percent. Lenders generally charge a monthly insurance premium to protect against default, called private mortgage insurance, or PMI. No Fee Mortgage Plus doesn’t, and that could save as much as $20,000 on a $200,000 30-year loan with 10 percent down.

But Bank of America compensates for assuming those costs by charging higher rates on the mortgage, which over time will more than offset up-front savings. The rates in mid-August on its no-fee loans were as much as 0.375 percent above the national average, according to Keith Gumbinger, vice president of HSH Associates, a publisher of mortgage-loan information.

The Bottom Line
We put the loan to the test with a hypothetical purchase of a $250,000 home in our home base of Yonkers, N.Y. A Bankrate.com search provided us with 22 lenders willing to finance $200,000 in a points-free, 30-year, fixed-rate mortgage. Of those, Bank of America’s 7.0 percent rate tied for the highest. We compared it with one loan at 6.5 percent and estimated closing costs of $6,241. Bank of America’s loan would save us $2,040 if we were to keep the house for 5 years. But if we were to stay for 15 years, the competitor’s loan would save us $8,083. And if we were to hold the mortgage for 30 years, the no-fee loan would cost $24,427 more.

While the No Fee Mortgage Plus loan might not live up to its billing, it warrants a look if you are in the market for a short- term property or plan to put down less than 20 percent.—Greg Brown

This article first appeared in the October 2007 issue of Consumer Reports Money Adviser.