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The Ins and Outs of Closing Costs

Whether you’re buying a home or refinancing your old loan, closing costs are inevitable. They are either paid by the borrower, the lender, or both.  There are two categories of closing costs: those that come from your mortgage lender, and those that come from third parties (third party fees). When a lender pays all of the closing costs of a mortgage, it’s known as a zero-cost loan.

Mortgage lender closing costs are summarized in Section 800 of a Good Faith Estimate. They may include origination fees, discount points, underwriting fees, and document preparation fees. Lenders will often give these fees unique names, which make it difficult to compare offers. For this reason, it’s better to compare total loan cost when deciding which lender is right for you. Third party closing costs are costs paid to any company other than your lender. These include appraisal fees, credit report fees, tax service fees, and title insurance.

Image courtesy of hywards at FreeDigitalPhotos.net

Image courtesy of hywards at FreeDigitalPhotos.net

There are mistakes to be made when paying closing costs, which will raise the cost of the financing process significantly. Here are two major things to keep in mind when financing your loan.

Don’t overpay on discount points

One discount point is equal to 1% of your loan size. So with a $200,000 loan, one discount point would equal $2,000. Discount points can be a good way to save money over the long run. The rule of thumb is that if you plan to stay with your original loan more than 7 years, discount points are a good investment. One thing to note about discount points is that they are used by lenders to make rates more attractive. The “prime rate” lenders advertise is available to borrowers who are willing to pay discount points, usually around four or more.

Don’t forget about zero-cost loans

Of course, no loan is truly cost-free. But in a zero-cost loan, the fees are paid by the lender. They don’t do this for free, of course. The lender recoups the cost in your mortgage rate. So in exchange for paying no closing costs, you take a slightly higher mortgage rate. The time to consider a zero-cost refinance or loan is when you’ll be lowering your existing rate by at least 1%.

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