Understanding Refinance and Home Loan Closing Costs!

Mortgage and Lending with Oak Valley Mortgage-California Home Loans and Refinancing



 There's an old saying, "If it's too good to be true, it probably is!" Such is the case with refinancing or purchasing a home and the topic of closing costs. Many lenders in the industry will claim NO CLOSING COSTS, however, everyone actually plays on a level playing field! The only difference between mortgage companies are the investors and/or banks that they are individually approved with, that's it! Closing costs are ALWAYS going to be associated with refinancing or purchasing a home. Why? There are many parties involved in the loan process and obviously, no one works for free!

First of all, what are typical closing costs?

Loan Origination Points~Amount paid to lender for helping you obtain financing.

Appraisal Fee~Paid to appraiser for calculating the estimate value of the subject property.

Credit Report Fee~Fee to run your credit report to see your payment history and credit scores.

Processing Fees~Processors handle the paperwork of your loan and streamline the process.

Underwriting Fees~Paid to the investor for paperwork and clerical costs incurred on their end.

Recording Fees~For getting the deed to the property recorded with the county.

Notary Fees~A notary is licensed by the state to witness the signing of your loan documents. Mobile notary service is available to have you sign docs in the comfort of your own home!

Title Fees~Title Insurance protects you and your lender in the event that there is a discrepancy in the chain of title,boundary line discrepancies, etc.

Escrow Fees~Escrow acts as the money handler in the transaction and sees that all parties are paid properly.

Homeowner's Hazard Insurance~This policy protects you in the event that there there is a flood,fire,robbery,etc.

Home Inspection Fees~Home inspectors fees apply to purchasing a new home, allowing the inspector to look at the property and inform you of any defects in the home.

Loan Discount Points~Loan discount points apply to paying the bank more money up front to "buy down" your interest rate to a rate lower than the "prevailing rate."

Borrowers typically have 3 options for paying closing costs:

  1. Pay all associated closing costs "out of pocket."

  2. Increase your loan amount and have "non-reoccurring closing" costs paid through the loan.

  3. Pay a higher interest rate and let the lender give you a "closing credit" towards "non-reoccurring closing costs."

I will go into detail with each option, so you can make better decisions about how you prefer to have closing costs paid. Each has their benefits and setbacks as in any other decision in life that you need to make. Being well informed of your options will empower you to do what is in your best interests.

Paying closing costs "out of pocket"

Paying closing costs "out of pocket"means exactly that, you pay for your closing costs with money on hand. IE: checking,savings,sale of stock,etc.

Benefit: You get the benefit of the prevailing interest rate and an exact loan amount. When I say exact loan amount, I mean the loan amount will be that of your new home's purchase price or a loan amount that is equal to your existing loan balance on your home if you are refinancing.

Setback: Many times, borrowers don't have sufficient "cash on hand" in their checking or savings account to pay for their closing costs "out of pocket." The following two options below may put less strain on the borrowers current financial picture and allow more flexibility to the borrower.

Increase loan amount and have closing costs paid through the loan.

Increasing the loan amount as the buyer of a home would be done through a "seller credit." For example, if the asking price for the home is $300,000 and you offered the seller $305,000 with a $5,000 "seller credit" towards your closing costs, your non-reoccurring closing costs would be paid for "through the loan." This strategy works great for home buyers with less cash on hand than needed pay the closing costs. Oak Valley Mortgage has access to many investors that allow up to 6% sellers concessions towards non-reoccurring closing costs, which will even allow you to "buy down your interest rate", meaning lower monthly payments! This strategy can even be done with 100% financing!

Increasing the loan amount on a refinance and paying your closing costs through the loan can also be done. Lets say that you originally purchased your home for $300,000 2 years ago and you have made payments towards the balance. Now the balance on your loan is $285,000. If the closing costs were $5,000 for the new loan, you could increase your existing balance of $285,000 to $290,000 and pay for your closing costs "through the loan." Why would someone refinance and do this? They may want to get locked into a 30 year fixed instead of a short term adjustable loan. Or, if there is enough equity in the home, you may want to "pull cash out" of your equity to pay off high interest rate credit cards, buy a car, pay for college tuitions or maybe child's wedding.

Benefit: You didn't have to come up with cash for closing cots.

Setback: You now have a higher loan balance than before.

Lender paid through a higher interest rate

Lenders can actually take care of your non reoccurring closing costs for you through the form of a "lender credit." How does this work? It's simple, you accept a higher interest rate than if you were paying closing costs "out of pocket" with a lower interest rate. Why does this work? The lender gets paid a higher amount from the bank for locking you in at a higher interest rate, and simply passes a portion of the "rebate" from the bank back to you. The bank doesn't mind doing this, because you are paying more in monthly interest over the life of the loan.

Benefits: You don't need to come up with cash for closing costs.

Setbacks: You will be paying a higher amount in interest over the life of the loan.

Teaming up with a mortgage professional that cares to take the time and sit down or talk to you over the phone about your personal situation can make a big difference in your home loan experience. Be sure to find someone that you feel comfortable talking to and is obviously looking out for your benefit and not just theirs! As one of my professors at Chico State emphasized over and over, seek out someone to have a Win-Win relationship with!

Scott Gormley
Oak Valley Mortgage
2006 Chico Assoc. of Realtors Affiliate Chairman
Direct: 530.592.8362
Fax: 530.267.5555
Website: http://www.caloan.com/

"You find the perfect home, we'll find the perfect loan!"


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Show All Comments
Thesa Chambers
Fred Real Estate Group - Bend, OR
Principal Broker - Licensed in Oregon
this is great information - I am always amazed at the number of Realtors that do not understand this information - recurring and nonrecurring costs is pretty simple if you break it down but many just do not get it.  Thanks for sharing
Apr 28, 2007 04:57 AM #1
Scott Gormley
Oak Valley Mortgage-California Home Loans and Refinancing - Chico, CA
Ofcourse  :)
Apr 28, 2007 05:27 AM #2
SEO Expert: Michael George
Phoenix, AZ
Real Estate and Law Firm SEO
Thanks for clearing that up. I get frustrated when clients do not understand (do not believe me, that is) that there are third parties involved.  A big part of this is deceptive advertising by our competition, of course.
Apr 28, 2007 05:47 AM #3
Provadus Home Loans
Provadus Home Loans - Marietta, GA
Technology bringing you home.
Great post!!  You break it down very simple for everyone to understand!  It can be very complicated at times.
Apr 28, 2007 10:07 AM #4
Scott Gormley
Oak Valley Mortgage-California Home Loans and Refinancing - Chico, CA

I'm happy that everyone is finding this breakdown useful. I hope it serves the general public well :)

Have a great weekend everyone! 


Apr 28, 2007 10:11 AM #5
Jacob Morales - Arizona Mortgage Planner
US Bank - Scottsdale, AZ
Great post. I really appreciate when people properly explain our fees and how they work. Especially when it comes to educating consumers as a whole. Nice job!
Apr 28, 2007 01:00 PM #6
Luisa , Orellana
Greater LA Escrow - Los Angeles, CA
Greater LA Escrow
This is a very great post! I often find myself trying to explain these fees to the principals in an escrow. Since escrow prepares the Estimated Closing Statements/Hud's we often get called to explain these fees. My principals usually say the loan officer got to complicated with the explanation. This is very simple and direct. Thanks for sharing!
Apr 28, 2007 01:28 PM #7
Dominick Gaccino
Dominick gaccino - Peekskill, NY

very good post


I try and do hand written GFE asap so cleints know what they will be paying


Of course that no closing cost claim that is made really screws honest Borkers.


Clients want to belive that loans will be done for free..................


i made a post a few weeks back...if you belive that do you believe and Santa Claus and the easter Bunny Too?

Apr 28, 2007 04:16 PM #8
Eddy Martinez
Nationwide Funding Group - Highland Park, CA

This is a damn good blog Scott!!!!!

Lenders who offer "no closing costs" loans get a huge back end rebate and as a result the rate they can offer is always .875-1.625% higher.



Apr 29, 2007 09:13 AM #9
Eddy Martinez
Nationwide Funding Group - Highland Park, CA

About a year and a half ago i had a borrower in Utah who didnt want to finance his home refinance closing costs. This borrower was very old fashioned and came to the closing with a personal check for the closing costs.

I havent had a situation like that since then



Apr 30, 2007 11:09 AM #10

I like this posting because in NYC I have been trying to refinance my home but I've been having problems with several mortgage companies that seem to be trying to pull the wool over my eyes.  Now I know what they should be charging me for.

Apr 30, 2007 03:04 PM #11
Lewis Poretz
Apex Home Loans - Annapolis, MD
Business Development Manager

Scott -  I try my best to break down to clients like this -----


There is a difference between closing costs and settlement costs ---   AND  upfront costs that if not paid show up as settlement costs......


Lewis Poretz


means being a part of it 

Apr 30, 2007 05:39 PM #12
Eddy Martinez
Nationwide Funding Group - Highland Park, CA

Lewis, thats true...................

Scott's post above puts all of in that layman's terms, it was a nice refresher course in a sense


May 01, 2007 12:16 PM #13
Lorinda Ward
Keffer Realty - Norfolk, VA
Serving, Hampton Roads Virginia. Norfolk, Chesapeake, Va Beach
This is a great post full of needed information.  Thank you for help educating.
Jul 14, 2007 12:08 PM #14
Nicole S
Mount Olympus mortgage - Miramar, FL

Great post! I have explained each of those situations to my borrowers time and time again. Closing costs seem to be such a touchy subject. Its almost like clockwork... at the very last second, right before the conversation is over you hear the inevitable "I have one last question. What are the closing costs?" I am surprised at how many people believe they must come out of pocket and dont know the options that are available to them.

I personally prefer to sit down with my borrowers and look at the GFE together to go over what each fee is. I have nothing to hide and they appreciate it.



Aug 27, 2008 04:13 AM #15
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