Spoiler alert: all mortgage loans have closing costs. But what about the so-called “no closing cost” loans? They too have closing costs it’s just a matter of who pays for them and how. Closing costs must be paid by someone. In different parts of the country, it may be customary for the seller to pay title insurance or the attorney fee. There are no national guidelines regarding who pays for what.
It’s your loan officer that will provide you with a Loan Cost estimate that will list individual line item charges that you will likely encounter at your final settlement. When buying a home, it can be part of the negotiations between the sellers and the buyers. The sellers have their costs and the buyers their own, but buyers can always ask the sellers to pay for some or all of the buyer’s fees. Sellers aren’t obligated to, but the buyers can certainly ask.
All closing costs can be divided into either the buyer’s responsibility or the sellers. When heading toward the closing table when buying a home, the buyers will typically need to bring enough funds for any down payment, closing costs and cash reserves in the form of a cashier’s check or by wiring the necessary amount directly to the settlement agent. Today, wiring the funds is the preferred method. When purchasing, the buyers don’t have much of a choice whether or not to pay the funds. Either directly or to ask the lender for a lender credit by adjusting the selected interest rate up slightly. This increase in rate allows lenders to have extra funds available to the buyers to offset these charges.
When refinancing, borrowers also have the option of adjusting the rate and receiving a credit from the lender. Working with a loan officer, the borrowers can perform a quick cost-benefit analysis to determine if increasing the rate is enough to significantly offset the borrower’s fees. As mentioned in the first part of this post, all loans have closing costs it’s just a matter of who pays for what and how. If the sellers decline to pay any part of the buyer’s fees, those fees are all the responsibility of the buyers.
The buyers can pay for them out of pocket or ask the mortgage lender to adjust the interest rate on the loan upward. Doing so allows the lender to provide some degree of a lender credit at the settlement table. How much of a credit? That depends upon the loan amount, type of loan and loan term. For example, with a $400,000 loan amount, and a rate of 4.00 percent is available with no points, 4.25% might be available with a 1% credit toward closing costs. On a $400,000 mortgage, that’s $4,000 in credit which is a pretty good estimate of costs for most parts of the country.
On the other hand, for smaller loan amounts, increasing the rate may not be much help. With a $100,000 loan and a 1% credit, that’s $1,000 that can be applied to closing costs at settlement. It’s certainly better than no credit at all just remember the larger the loan the larger the credit.
Finally, borrowers can elect to roll some or all of the closing costs when refinancing. And in most instances, borrowers do just that. On a $400,000 loan, the new loan would be $404,000. Two things here-yes, that adds to the loan amount and yes that increases the monthly payment. But only slightly so. Using a standard 30 year fixed rate of 4% as an example, the difference in monthly payment is only $19 per month.
Compare that with hitting a bank account to pay for closing costs when refinancing, reducing a checking account balance by $4,000. Now you can clearly see why most borrowers go ahead and roll in the closing costs because the difference in monthly payment is negligible compared to the financial hit taken when paying for costs with a checking account.
Finally, all four approaches discussed can occur at the same time. Borrowers can pay out of pocket, pay for them with a lender credit, adjust the rate higher, or roll them into the final loan amount. And any combination of these. There are closing costs on every loan. You can’t get around that. Someone must account for them and when refinancing it’s completely up to the buyers.
