All mortgages require closing costs. They can be paid by the borrower, the lender and sometimes the seller. It may be a combination of all three. The most important part is to keep the costs in line.
There are four different areas that borrowers make mistakes in when it comes to closing costs.
Don't overpay on discount points. Discount points are a one-time, upfront fee paid at closing which gets a borrower access to lower mortgage rates than "the market". They're paid as a percentage of your loan size such that 1 discount point carries a cost equal to 1% of your loan size. In Minnesota, it had been very common to see a 1% origination fee added to your closing costs. Basically that is 1 point that you are paying to lower your rate. Talk to your lender about the costs. See if you really should pay any discount points. If you do not plan to be in your home for at least seven years, it probably doesn't make sense to pay points. Calculate the savings on a monthly (or yearly) basis and see how long you have to be in the house to recoup the costs.
Choose low or no cost options if possible. If you do not plan to be in the home for more than 3-5 years, you may want to choose a higher interest rate and let the lender pay your closing costs. For those refinancing, sometimes it makes more sense to have the lender charge you a higher rate and pay less in closing costs, especially if you think rates are going to keep dropping. That is one way many people have refinanced more often – they are not increasing their loan amount to cover the closing costs and they aren't paying the costs out of pocket.
Choose the correct loan. Buyers can choose between conventional, VA, FHA and USDA loans depending on where they are buying and what they qualify for. FHA has an upfront mortgage insurance of 1.75% and a monthly insurance. VA has a VA funding fee added to your mortgage and USDA has a guarantee fee. Conventional loans require mortgage insurance unless you have 20% down. Plus they all require closing costs. One of the variables is the cost of the appraisal. Make sure you select the correct loan for your needs so you are not paying extra in closing costs or mortgage insurance.
Select the right lock time. Lenders have different lock time frames, typically 30, 45 and 60 day windows. If you are closing soon, you may be able to lock with a 30 day lock. A 30 day lock is less risky and usually a lower cost than a 60 day lock. You also do not want to lock with too short a lock. If you think you are closing in 30-45 days, use the 45 day lock. If you are refinancing and need to get a 2nd mortgage subordinated, choose a longer lock – at least the 60 day lock. If you need to extend your lock, it can cost you more money and that will increase your costs. By selecting the correct lock in the beginning you can save yourself money.
Talk to your lender and make sure you are getting lowest costs that you can. Shop for title insurance if possible. See if you can negotiate any of the costs. It's also a good time to shop for homeowners insurance, maybe you can get a lower insurance premium to help lower your costs.
Leslie Vanderwerf, NMLS ID#335509, American Mortgage & Equity Consultants, NMLS#150953 - Email - Website
