October 20th, 2016 8:58 AM by Jackie A. Graves, President
Closing costs are rising.
New loan regulations and financial safeguards have
increased to bank costs, and banks have passed those costs on to
consumers. Bankrate.com says mortgage closing costs are 6% higher as
compared to last year.
There are ways to limit what your closing costs, though, and
what you'll pay for your loan.
Want to have the lowest closing costs available? Start by
avoiding the common mistakes consumers make when shopping for a
You, too, can get a great rate.
All mortgage loans require closing costs. The costs can be paid
by the borrower, by the lender, or by a combination of the two.
Mortgages with which a lender pays all closing costs are known
as "zero-closing cost mortgages".
The loan's not free, however.
In exchange for paying costs, the mortgage lenders will raise
the mortgage rate for a borrower by a nominal amount -- usually 12.5 basis
points (0.125%) for a $250,000 loan size.
With a zero-closing cost loan, fees of both types -- lender
costs and third-party costs -- are paid-in-full.
Mortgage lender closing costs may include such items as
origination and discount points; underwriting fees; and, document preparation
Lender fees are summarized in Section 800 of a Good Faith
The second type of closing costs -- third-party closing costs --
are costs paid to companies other than your
lender. Third-party closing costs may include appraisal costs, credit report
costs, tax service fees, and title insurance.
Many borrowers like zero-closing cost option -- especially when
doing a mortgage refinance such
as an FHA Streamline Refinance or VA Streamline Refinance.
However, going zero-cost is just an option. You may prefer to
pay your closing costs up-front in exchange for that lower mortgage rate; and
closing costs are a part of every loan made.
If you plan to pay closing costs, then, you
won't want to overpay. There's no need to pay more closing costs than
These four tips should help you minimize what's owed at
Discount points are a one-time, upfront fee paid at closing
which gets a homeowner access to lower mortgage rates than "the
market". They're paid as a percentage of your loan size such that 1
discount point carries a cost equal to 1% of your loan size.
A $200,000 loan with 1 discount point, therefore, would require
$2,000 in "points" to be paid at closing.
For homeowners who plan to keep their mortgage for 7 years or
more, paying discount points can be a sensible way to pay a little bit upfront
in exchange for longer-term mortgage savings.
For everyone else, points may be wasted cash.
That said, discount points have a secondary effect -- they lower
your loan's APR. Because of this, lenders will often use discount points as a
way to make their rate quotes look more attractive in the marketplace.
Lenders know that consumers shop by APR even though they shouldn't.
One way to reduce your closing costs, then, is to pay the proper
number of points for your particular situation, which may actually be zero.
Discount points can be tax-deductible, but they can't be
refunded once paid.
Opposite from paying discount points, mortgage borrowers will
typically have the option of doing a low-cost or zero-closing cost mortgage.
With a low-cost or zero-closing cost mortgage, closing costs are
paid by the lender on behalf of the borrower. In exchange for paying the fees,
the lender will raise the mortgage interest rate for the borrower's loan.
The more costs that the lender covers for the borrower, in
general, the higher the increase to the mortgage interest rate.
Low- and zero-closing cost mortgages are appropriate in a number
of situations including scenarios in which the borrower plans to move or
refinance within the next 36 months or so; or, when the borrower expects that
mortgage rates may drop in the future.
Low- and zero-closing cost mortgages are a good way to
"step down" with your mortgage rate while the market gradually
Today's home buyers have access to a bevy of mortgage products.
Buyers can choose from between conventional loans, FHA loans, VA loans,
USDA loans, jumbo loans, and more.
Each loan type meets a specific borrower need.
For example, FHA loans are typically best for buyers with
less-than-perfect credit and minimal funds for a downpayment. VA loans, by
comparison, are best for homeowners with military experience who wish to put little or nothing down.
Conventional loans are the default choice for buyers with twenty
percent down, and USDA loans can be terrific is sparsely-populated parts of the
Each loan, though, comes with its own set of closing costs.
Select the wrong loan type for your needs and you may pay more than is
For example, a FHA loan requires 1.75% of the loan size to be
paid at closing, or $1,750 per $100,000 borrowed. For borrowers with three
percent to put down, the HomeReady™ mortgage may be a better option.
The same is true for the VA home loan.
VA loans allow for 100% financing, but typically require a two
percent "funding fee" to be paid at the time of closing. That 2% cost
must be weighed against the cost of not using a VA loan.
USDA loans carry upfront closing costs, too.
Therefore, when choosing your loan type, consider more than just
the mortgage rate -- consider the loan's upfront costs as well.
Another way to reduce your loan closing costs is to lock your
mortgage rate for the appropriate time frame.
Rate locks are typically available in 15-day increments up to 60
days, and then in 15- or 30-day increments thereafter.
Mortgage lenders "charge more" for longer rate locks.
A 30-day mortgage rate lock is less expensive than a 60-day rate lock,
for example, and a 60-day rate lock is less expensive than a 90-day rate
The additional costs of a longer-term lock are paid as either
cash as closing, or in the form of higher mortgage rates. An extra 30 days on
your rate lock may add 25 basis points (0.25%) to your mortgage rate, in other
However! Lenders also charge
fees for "blowing" a rate lock. That is, not having the loan
funded during its current lock-in window.
Blowing a rate lock require a rate lock extension, and rate lock
extensions carry high costs. It's more expensive to extend a 30-day rate lock
by fifteen day, for example, than it is to select a 45-day rate lock at the
Keep your closing costs low by selecting a realistic and
appropriate rate lock for your loan.
By DAN GREEN - To view the original article click here