Mortgage closing costs are rising
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 rose 1.6% last year compared to the year prior.
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 mortgage.
You, too, can get a great rate.Verify your mortgage eligibility (Jan 25th, 2020)
Mortgage closing costs: How they work
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 fees.
Lender fees are summarized in Section 800 of a Good Faith Estimate.
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.Verify your mortgage eligibility (Jan 25th, 2020)
4 mistakes that lead to unnecessary closing costs
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 necessary.
These four tips should help you minimize what’s owed at closing.
Don’t Overpay On Discount Points
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.
Opt For Low- Or “Zero-Closing Cost” When Appropriate
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 improves.
Choose The Proper Loan Type For Your Needs
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 country.
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 necessary.
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 2.3 percent “funding fee” to be paid at the time of closing. That 2.3% 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.
Choose A Realistic Rate Lock For Your Loan
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 lock.
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 words.
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 start.
Keep your closing costs low by selecting a realistic and appropriate rate lock for your loan.
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Mortgage closing costs can increase your costs of homeownership, and lower the benefits of a refinance. Be smart about your loan and how you pay your fees.
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