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Thursday, December 1, 2011

Handling high closing costs

Closing costs can increase the price of a home by as much as $10,000, sometimes more.  Borrowers who are “cash-poor” can ask for assistance, or talk to their lender about a lender credit toward closing costs.
Making sense of the story
  • Some lenders advertise that if borrowers agree to accept a mortgage interest rate from a quarter to a full percentage point higher than they would ordinarily qualify for, they can receive credit toward their closing costs.
  • These mortgages are sometimes called no-closing-cost loans, though the term is misleading.  The credit usually covers only fees charged by the mortgage broker or bank, like the loan origination fee, the underwriting expense, and the appraisal.  That generally leaves title insurance, mortgage-recording taxes, insurance, and escrowed taxes to cover.
  • The amount of credit depends on total closing costs and other loan details.  Generally, for every one-eighth of a point increase in interest rate, borrowers receive a credit worth half a percentage point of the principal amount.
  • While these mortgages can be helpful to some, borrowers should carefully review all the details.  There are pluses and minuses to these loan types.  A downside is the higher rate and monthly payments remain in place through the life of the loan.
  • Doing a side-by-side comparison of loans with and without the credit can be helpful.
clear skies,
Doug Reynolds

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