Reduce the Burden of Closing Costs when Mortgaging

by 10 Jan 2014
Closing costs are always a function of borrowing. Following are options that mitigate the burden of coming up with the extra cash to seal the deal.

Ask For Closing Cost Credit - In order to reduce closing costs in a home buying situation home buyer asks seller for closing cost concession in the purchase offer. 

Most lenders allow for up to a 6% seller credit, varies on down payment and occupancy. Realistically, closing costs equate to about 2.5% of the sales price. It’s based off of sales price because the sale value of the home is what the transaction is set for. A seller credit for closing costs means the seller receives smaller ‘net proceeds’, meaning more money comes out of their pocket.

Make A Higher Offer - as discussed above in a seller credit situation the seller has to agree to a concession. A buyer who can qualify, could offer a higher purchase price, say two and half percent over list price giving seller opportunity to not lose money- everyone wins.

Granted, house will still have to appraise, but option remains as favorable alternative to make both parties square. Essentially, this approach allows the buyer to finance the fees over 360 months on a 30 year note by virtue of taking larger loan amount used to purchase larger priced home.

Finance More Money let’s say you plan to buy a home for $400,000 and have $24,000, which would be the total cash to close required. Rather than asking for a seller credit for closing costs, you pay your own fees of $10,000 and the remaining $14,000 (3.5% down on an FHA Mortgage for example) seals the deal! 

Yes, the loan amount is $10,000 bigger, but the strength of the offer remains intact, because no concession was requested. In a refi loan it’s simply increasing the amount borrowed thereby rolling the fees into the loan amount.

Inflate The Interest Rate - It’s the same way a no-fees refinance works, you agree to take higher mortgage rate in exchange for a monetary concession towards closing fees.

It’s not uncommon for a lender to offer a "fee credit" anywhere from few hundred to a few thousand dollars, thereby mitigating exposure to added fees. 

Consider The Interest Paid Over Time

In short, financing creates a higher cost loan due to more interest paid. It is difference of $43,088 more in interest over 360 months if you take a lender credit for $3000 in exchange for a 4.875% interest rate, when 4.375% is available without a lender credit-assuming a $400,000 loan amount. A spread of .5% in rate for a lender credit in the neighborhood of $3,000  can be tied to today’s interest rates.

The more in interest rate and or loan amount or creates larger interest expense over time assuming the loan is not refinanced (most are re-mortgaged every 3-5 years). The more purchase paid for the house also creates a higher property tax obligation.Property taxes are based on a percentage of the sales price. Assume about 1.25% of the purchase price for annual property taxes.

While financing closing fees can solidify your ability to close the transaction. In the decision-making process, be sure to comparatively look at your individual advantages and disadvantages of financing those costs. Fees are assessed every time the property is encumbered (financed). Expect closing costs on purchase transactions around 2.5% of sales price and on refinance transactions to be 1% of the loan amount.

Scott Sheldon is mortgage originator based in Sonoma County, CA.

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