Before you raise the roof, avoid raising those closing costs
Since the typical mortgage loan requires certain fees associated with closing, it’s important to understand what could raise those final home closing costs.
Mortgage closing costs can be paid by the borrower, lender, seller or a combination of those parties. In some cases, a homebuyer can even work with the seller to negotiate certain closing costs to be paid by the seller. This way, the buyer has fewer fees to pay upfront and may be able to pay any other fees through the mortgage payment over the life of the loan.
Regardless of who pays, closing costs are broken down into two types:
- Mortgage lender closing costs: these could include items like discount points, underwriting fees, document preparation fees, etc.
- Third-party closing costs: these costs are paid to companies other than your lender and include items like appraisals, home inspections, credit report costs, etc.
Although there are a number of fees associated with closing your loan, there are steps you can take to avoid paying more than necessary. Here are the common mistakes that raise home closing costs and how to avoid them.
“Not all lenders have lender specific fees! At Wyndham Capital Mortgage we don’t charge application fees, underwriting fees, verification fees, or processing fees.”
Overpaying on Discount Points
Discount points are paid once up front to help obtain lower mortgage rates. These points are a good idea for people planning to keep their mortgage for more than seven years. However, if you’re planning on living in the home just a few years, it may not make financial sense to spend any money on discount points. You can reduce closing costs by paying for the correct number of points that fit your situation.
Points Definition: The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount (i.e., two points on a $100,000 mortgage would equal $2,000).
“The average “break-even” point on paying discount points is 6 years!
For example: Let’s assume a customer is looking at a loan amount of $300,000. When they are looking, the lowest rate without any additional cost or points is 2.75%. There may be a lower rate available but it could mean an additional cost. It is possible a rate of 2.5% is available but that may cost an additional $3,000. The payment difference between the 2.75% and 2.5% is $40/month, but the total cost difference is $3,000! If the consumer chose to go with the 2.5% with the additional cost this would take 6.25 years to break even or recoup the cost. $3,000/40 = 75 months or 6.25 years. Studies show the average tenure for someone to be in a home is five years. So, paying “points” would only make financial sense if you end up being in the home for 6 years+.”
Not Locking Your Loan at a Realistic Rate
Lenders may charge more for longer rate locks. The cost of a longer-term rate lock can be paid as either cash at closing or in the form of a higher mortgage rate. Lenders may charge more for missing your rate lock. If your loan isn’t funded during its lock-in window, it may be subject to extension fees. You can avoid these additional costs by locking in your loan at a realistic rate and within a realistic timeframe. Rates typically remain locked for 30-60 days, so if you don’t plan on purchasing a home within that time frame, it is recommended to wait, which can lower your home closing costs in the end.
“Ask your loan officer how long it takes to close – an experienced loan officer may be able to expedite the mortgage process if you can be proactive!”
Not Asking Your Lender for a Credit
Your lender may have a program that lets them give a borrower credit toward home closing costs. Typically, the borrower agrees to take a higher mortgage rate in exchange for lower settlement costs. If all your costs are paid at a higher rate, it’s considered a no-cost loan. Keep in mind that some credit programs may only cover certain lender fees and not third-party fees.
If your lender covers some of its fees, you’ll likely pay more for your monthly mortgage payments but you won’t need to come up with all the money needed for home closing costs upfront. In other words, you pay less out-of-pocket costs, but you pay more throughout the life of the loan because you have a higher mortgage rate.
Failure to Educate Yourself on the Type of Loan that Will Fit Your Needs
There are several types of mortgage programs borrowers can choose from. They include FHA loans, conventional loans, VA loans, USDA loans, jumbo loans and more.
Conventional loans are typically the most used choice for people who put 20 percent down. FHA loans can benefit people with low credit scores and limited money for a down payment. If you would like more information visit FHA’s site at https://www.hud.gov/program_offices/housing/fhahistory. VA loans are designed for active and retired military members and come with more lenient requirements. USDA loans are good options for people living in unpopulated areas. Each loan comes with its own set of home closing costs. To help save on closing costs at the end, it’s suggested to choose a mortgage lender who can explain all the programs and help you decide which one makes the most sense for your situation.
While there may not be a way to completely avoid paying all home closing costs, you can minimize paying more than necessary by steering clear of these common mistakes homebuyers make that can raise their costs.
Do you have more questions about understanding home closing costs? Consider us as a resource to learn more about what to keep in mind when purchasing or refinancing your home.