Does it smell funny in here? Like upwithclosingcosts?
What is up-with-closing-costs?
It can be surprising for consumers to hear the total dollar amount needed to close on a refinance of their mortgage. Granted, even though most borrowers finance the closing costs in to the new loan amount, the idea of increasing your loan amount by 4, 5, 6, or $7,000 can take the wind out of an otherwise exciting conversation.
So why so high?
Here is the short version — each process and cost that had to be completed when you purchased your house and got your original mortgage has to be completed again for the new mortgage (new credit report, appraisal report, new file to be underwritten, new flood cert, new closing attorney or title company, updated title search, mortgage fees, state and recording fees and title insurance fees, etc).
Here is the longer version — a refinancing of your mortgage is not just a “re-do” of your mortgage. It is obtaining a new mortgage for the purposes of paying off the old mortgage. A lot of people mistakenly think that because mortgage rates are lower, that a quick phone call to their current loan services will allow them to redo a few pages with the lower rate, drop their monthly mortgage payment and move on. But, because loans are sold in a secondary market, the new loan must conform to the current guidelines in the market. And because guidelines change (loan to value ratios, combined loan to value ratios, debt to income restrictions, credit score requirements, etc.) and because personal variables change (your credit score, the value of your house, your income and monthly debt, etc.), these things have to be re-verified to confirm that you do, in fact, qualify for a new mortgage.
Does the current mortgage company understand they are going to lose your business?
Yes. And in some cases (depending on the servicer), because of the current state of the economy, they are glad to be losing your business (your loan paid in full and coming off of their books).
But back to the closing costs . . . can anything be done to get the closing costs lower? or what about a no closing cost option?
The closing costs are a direct product of the interest rate. The lower the interest rate, the higher the closing costs. The higher the interest rate, the lower the closing costs. In the past (as recent as December 2008), mortgage originators could offer customers the option of doing a no-cost refinance. By raising the rate on the mortgage above the current market rate, lenders would pay additional dollars to the originator, which in turn could be used to pay for part or all of your closing costs.
Here is an example: assume that you have a $250,000 mortgage at 6.5%. You have no idea how long you might live in the house. In the past, if today’s rate was 5.0%, I could offer my clients a rate of 5.75%, and at that rate, the lender might pay an additional $$6,000 in commission to Hillside Lending. In that scenario, we would pay for the appraisal fee, the credit report fee, attorney fees, recording fees, title insurance, state tax, recording fees, etc. and still have enough left over to collect a commission on the closing. So, the customer has moved their rate from 6.5% to 5.75% with $0 in closing costs (no costs out of pocket and no closing costs financed in to the new loan amount — essentially, no time to make up the closing costs, so it won’t matter if they move in 12 months).
In December 2008, when mortgage rates took their first dip down, lenders stopped pricing their rate sheets to allow for this type of no-closing cost option. Why? For fear that the entire country would refinance (they be writing checks for $6,000 at each closing) and if interest rates continued to fall even lower, those same consumers might refinance again, never keeping the loans long enough for the lenders to recoup their $6,000 investment. Similarly, the ability to raise the interest rate to get rid of the origination fee (points versus no points) has become difficult, and in most cases, because of the amount of increase in the rate, is cost prohibitive.
So, the best advice for closing costs? Getting the best mortgage is not necessarily about getting the lowest closing costs. It is about getting a great rate, with competitive closing costs, and great, professional service. I have had leads and clients (who, in the name of good consumerism and in the hopes of saving $100 in closing costs) have worked to get additional information or quote from another mortgage source (or even their current loan servicer), only to have interest rates go up 0.25% or 0.5% in the process and miss out on the chance of savings hundreds and hundreds of dollars over the life of the loan.
Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit http://www.hillsidelending.com.