The Truth About Mortgage Closings Costs and Points

Ken Mascia, the mortgage guru from Oxford Financial, is back today with the lowdown on Good Faith Estimates.

Comparing Lenders, rates and closing costs can be as confusing as driving in a foreign country where you can’t read the road signs. It’s sad but true. Many lenders actually like it that way because they got you lost in the numbers and you believe you’ve gotten a good deal.

Last week one of my own clients called me and said they wanted to talk about a “better deal” they were offered by a different mortgage broker. She had a Good Faith Estimate and I asked her to get it out see we could go over it on the phone. They were offering her a rate that was ½ percent lower than I was. Ouch! Then we looked at it a little closer. These guys were charging discount points and an origination fee that added up to almost $10,000. It was going to cost her $10,000 out of pocket to get ½ percent lower rate. The house payment would be $120 per month cheaper on that deal. So, $10,000 cost divided by the savings of $120 per month equals 83 months to break even. It will take 83 months of saving $120 per month before they even get the $10,000 back!

The idea of paying discount points is to buy down the interest rate. You are paying money upfront to obtain a lower rate over the life of the loan. Many people get so focused on interest rate that they lose sight of the cost of obtaining the rate. As a rule of thumb, I tell people that if it takes more than 36 months to recover the cost of buying down the rate it’s not worth it. The reason is because very few mortgage loans are around for more than 5 years. More often than not it does not make sense to buy down the rate and it typically takes 4 to 5 years just to break even.

• The truth about points: they usually benefit the lender and not the borrower.

Mortgage closing costs should only consist of things that actually have to be paid to a third party for providing a service that is necessary to get the loan approved. These costs include appraisal fee, credit report, underwriting, flood certification, closing document preparation, land survey, title company closing fee, title insurance, recording fees and courier fees. Other fees, which I like to refer to as “Junk Fees” are charged by the lender just to increase profit on the loan. These could be mortgage broker fee, loan origination fee, application fee, processing fee, etc. Sometimes a lender may offer you a slightly lower rate but they are adding in a bunch of junk fees to make up for it. The thing to do is to weigh the additional costs against the savings in the monthly payment to determine how long it takes to recover the extra charges.

• The Truth about Closing Costs: ONLY pay direct fees charged by third parties and don’t pay any junk fees.

The bottom line is that you want to limit the amount of closing costs and points that you pay. Most loans get refinanced or the people sell the home before they get a chance to benefit from paying all of the extra fees associated with buying down the rate. Don’t get fooled into thinking you got the lowest rate on the planet if it’s costing a small fortune to get it!

Read Ken Mascia’s other posts on mortgages and finance here.

[tags]mortgage, points, closing costs, mortgage fees, comparing loans[/tags]

photo by minusbaby

Written by Ken Mascia
Prime Capital Mortgage, 248.644.1200
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