Lower your Closing costs when getting a home loan / mortgage
December 28, 2007
Ways to reduce the closing costs associated with your home loan:
Let’s talk about closing costs that are associated with any home loan. Most people only think in terms of the loan’s interest rate, but there are other costs to consider when getting a mortgage.
1) The Cost of the money; AKA the interest rate.
2) The Cost to get the rate ; AKA closing costs.
So what are closing costs? And what important items should one consider when getting a home loan?
For example, almost every 10 minutes Countrywide bank runs a commercial on their “no cost refi.” It’s a gimmick. I mean, Countrywide is one of my banks, but it’s a little deceiving. For example, let’s say the normal 30-year fixed rate is 6.5%. But the closing costs to get this 6.5% rate is only only $2360 at closing.
Since Countrywide knows people are closing-cost sensitive, they’ll offer a 7.25% rate and offer a “no-cost refi.” It’s just marketing. You get a “no cost refi” but you’re paying more for your home loan each month because you have a higher rate. They are making more on the costs of the money (rate) so they can charges less to loan the money (closing costs.)
This shows the balancing act one must look at when getting a home loan. One should look at both; the cost of the money and the cost to get the money. I mean, who cares if your rate is 3.5% if the cost to get the 3.5% is $18,000 when the 6.5% is only $2360?
The above graphic is the typical $150,000 Austin home loan. You can see the closing cost are $2360 and the “pre-pays” are $2898. For a total of $5258. The actual closing costs are only $2360 but more than halfof the costs are taxes and insurance which you must pre-paid; hence the term “pre-pays.” So one’s closing costs are really two items put together: The actual closing cost and the pre-paid taxes/insurance.
Did you know you can get out of pre-pays and reduce your total at closing expenses signicantly? It’s simply done by “waiving your escrows” or paying your own taxes and insurance. Think about it: Banks are so greedy that they want you to pre-pay 4 months worth of your home’s taxes and 14 month’s of your homes homeowners insurance.
Banks then take this pre-paid money and make interest on your money all year. Then, at the end of the year, they pay your property taxes. Most people think if their home loan has an escrow account that the bank is applying this money monthly–but they aren’t.
This is why 90% of my clients waive escrows. This reduces or eliminates most of the pre-pays at closing. In the above example, waiving escros would reduce your closing cost by $2898. But most retail banks won’t show you this option nor do Realtors really encourage this. Why? Because to waive escrows means having a higher rate by .125-.25%. Banks want you to pre-pay taxes/insurance all year so they “discourage” waiving escrow by charging a higher rate on the money they lend. Plus no bank wants to risk a tax lien if you don’t pay your taxes.
So when getting a home loan think of this: It’s great to have a good mortgage rate, but the rate must be viewed in terms of the cost and fees it takes to get the rate.
Okay, we’ve discussed closing costs, pre-pays, escrows. Now what is a good rule of thumb on what closing costs are appropriate and which are junk fees? There’s not a cut-n-dry answer because one’s closing costs are dictated by several factors like: One’s credit profile, the day one closes their loan, the amount the seller is paying. towards their title policy…
But the short answer is this: Expect to pay 2.5-3% of your loan amount if you’re buying a 200K house or below. Watch out for discount points (which are almost always unnecessary) and fees associated with PMI (private mortgage insurance).
PMI is a totally different subject but in a nut-shell, if your loan has PMI try to avoid it. Call me. Please don’t close your home loan until I review your Good Faith Estimate (GFE). Because the only way to get out of PMI is to pay a lot towards your mortgage or simply refinance. My office is 512-996-8194. I’m licensed for the entire state of Texas.
Because how a loan is put together is just as important as the rate. What makes www.mylendingplace.com different is we approach mortgage lending with an eye on one’s overall financial picture.
True, it is becoming harder to avoid PMI since more banks/lenders require it now. But at least ask your loan officer/broker if you can avoid it. Because more banks are requiring PMI, if you’re 3-9 months out from buying your home, please call me so I can show you what you need to do today to get your credit in a position to avoid PMI when the time comes for you to buy.
Finally, now that you know a little about closing costs here are some ideas to lower them:
1) Ask your buyer if you can have their survey. Saves $400. The buyer isn’t going to need it anyway. Ask them if have one to save $$
2) Ask your buyer to pay your closing costs. This is one of the most overlooked aspects of the home buying negotiation process. Instead of asking your buyer to reduce the price of the home by 3-6%, ask them to pay your closing costs. Most banks will allow the seller to pay up to 3% of your closing costs-so just ASK. The worse they can say is NO or maybe only they’ll only pay 1%. 1% is better than no percent, right?
3) Call me and see if I can offer a better loan program than your current loan officer. As a mortgage broker, my overhead isn’t as high as a retail lender so call me and see if I can do better. Chances are I can. I don’t charge application fees so there’s nothing to lose except 30 minutes. Or if you simply have home loan questions, please email at jon@mylendingplace.com
Happy Closing,
Jon Spears, Mortgage Broker #56651
996.8194 (office)
577.2958 (Direct cell)
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