We have all heard the countless advertisements and discussions on home loans with absolutely no fees. In fact, there is a discussion post as to why the lenders don't pay the fees themselves. The later is a whole different topic. I want to enter into the debate now of whether it's more cost effective for someone to do a no cost refinance over a with closing costs.
First of all, it's important to define exactly what a closing cost is. Here is just a general list as well as a link to a credible source. Please keep in mind that these are costs not incurred by every lender, and I will mention what my typical costs are as well at the end of this post. So, with that said, here is the general list:
- Application fee
- Credit Report Fee
- Origination fee (percentage points)
- Discount fee (percentage points)
- Title search
- Title insurance
- Attorney fee
- Appraisal
- Homeowner's insurance escrow
- Tax escrow
- Private Mortgage Insurance
- Mortgage Insurance Premium (if FHA loan program)
- Inspection (if required by lender)
- Survey fee (if new construction and required by lender)
- Recording fee
- Transfer fee
- Administration fee
- Lender fee
- Processing fee
- Underwriting fee
The list goes on and on, and unfortunately there is no government regulation as to what fees a lender can/can't charge. The only stipulation is that there is no discriminatory practices associated with the fees.
Now, according to reports from 2006, the average cost to close a $100,000 home loan was 3% ($3,000) which included all fees associated. So, playing off this example, let's consider what it would cost to do a no-cost refinance.
On a typical loan of (hypothetically) $100,000 at an interest rate of 6.5% you will be paying a total of $127,500 in interest. Now, add on the additional $3,000 it took to close the loan, and you are looking at spending $130,500 in total cost associated with the loan.
On the flip side, we'll take a no-cost interest rate of 7.125%. On this loan, the entire $3,000 in fees are waived and paid by the lender. Your total associated cost in interest is $142,500.
So, by doing a no-cost refinance or purchase on your home worth $100,000, you just spent an extra $12,000.
Now, what are the alternatives? You ask this because you don't want to pay closing costs, and certainly don't want to pay more because of a higher interest rate. Here's the solution:
- Shop around to 3 different lenders and use an interview process to determine who to go with
- Negotiate with the lender/broker on fees associated with the loan once the rate is locked in (sorry all the LO's out there...I just wanted to help out the borrower here)
- Negotiate with your leverage (you have people that you know, I'm sure who are looking at financing options - use those referrals)
- Don't be afraid to walk away from the deal at closing if it's not what you agreed to (it's only too late if you sign on the dotted line)
There are a lot of upfront Home Loan Consultants out there! You, the client, need to really concentrate and carefully select the lender that will handle your biggest investment!
Please contact me for any other information regarding home loans. My cell phone is always on (315-264-1323), and you can email me at any time as well (Andrew_Scherer@Countrywide.com). Thank you for stopping in, and I look forward to hearing from you soon!!
*As promised here are my typical closing costs associated with my loans. Lender fee of approx $500, 1% origination, and the 3rd party fees associated with the file (attorney, title, appraisal, etc). However, I am very negotiable on the fees and will work with you to get your deal closed and funded!
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