Even though mortgage rates have been on the decline, closing costs are continuing to rise. New loan regulations and additional financial safeguards are raising bank costs, and banks are passing that cost on to consumers. Since all mortgage loans require closing costs, it’s important to make sure you don’t make the following mistakes that could raise those final costs.
The good news is closing costs can be paid by the borrower, lender, or a combination of the two. Those costs are broken down into two types:
- Mortgage lender closing costs – these could include items like discount points, underwriting fees, document preparation fees, etc.
- Third-party closing costs – these costs are paid to companies other than your lender and include items like appraisals, home inspections, credit report costs, etc.
Although there are lots of fees associated with closing your loan, there are steps you can take to avoid paying more than necessary.
Overpaying on Discount Points
Discounts points are paid once upfront to help get lower mortgage rates. These points are a good idea for people planning to keep their mortgage more than seven years. However, if you’re planning on moving in several years, it may not make financial sense to spend any money on discount points. You can reduce closing costs by paying for the correct number of points that fit your situation.
Not locking your loan at a realistic rate
Lenders charge more for longer rate locks. The costs of a longer-term rate lock can be paid as either cash at closing or in the form of a higher
mortgage rate. Lenders also charge more for missing your rate lock. If your loan isn’t funded during its lock-in window, you’ll face extension fees.
Not asking your lender for a credit
Your lender may have a program that lets them give a borrow credit toward closing costs. Typically, the borrower agrees to take a higher mortgage rate in exchange for lower settlement costs. If all your costs are paid through a higher rate, it’s a no-cost loan. Keep in mind that may only cover lender fees and not third-party fees.
If your lender covers the fees, you’ll likely pay more for your monthly mortgage payments but you won’t need to come up with all the money required for closing costs. In other words, you pay less out-of-pocket costs, but you pay more throughout the life of the loan because you have a higher mortgage rate.
Failure to Educate Yourself on the Type of Loan that Will Fit Your Needs
Right now, there are several types of mortgage programs borrowers from choose from. They include FHA loans, conventional loans, VA loans, USDA loans, jumbo loans, and more.
Conventional loans are the default choice for people who put 20% down. FHA loans benefit people with low credit scores and limited money for a down payment. VA loans are meant for military veterans who don’t want to put much money down. USDA loans are good options for people living in unpopulated areas. Each loan comes with its own set of closing costs. However, choosing the wrong one in the beginning can come back to haunt you in the end. That’s why it’s best to choose a reliable lender who can explain all the programs and help you decide which one is best for your situation.
Do you have more questions about understanding mortgage closing costs? Consider us as a resource to learn more about what to keep in mind when purchasing or refinancing your home.