Closing costs associated with getting a mortgage are a part of every transaction. Borrowers discover they need some cash for a down payment based upon the type of loan the loan officer suggested but also an amount set aside for closing costs. Lenders require various third party reports and services in order to comply with lending guidelines. Your loan officer will provide you with a Cost Estimate that will list each potential service and the associated fee. For example, you just signed a sales contract for a home. Your lender will need an appraisal in order to complete the loan approval process. Without an appraisal the lender can’t approve the loan. There are other fees associated with credit reports, settlement services, title insurance and so on.
Okay, but what about those “no closing cost” loans you keep hearing about? Do you still need to pay for a credit report and an appraisal if there are no costs involved? Well, there are costs, it just depends upon who pays for them and how. You can certainly ask the seller to pay for your closing costs but that really isn’t a no-closing cost loan, is it? There are fees, it’s just that someone else paid for them on your behalf.
The mechanics of a no closing cost loan are pretty simple once explained. Yes, there are costs, but you nor another third party pay for them directly. Let’s say you’re reviewing your cost estimate. You ask your loan officer about getting a lower rate by paying a discount point. A point represents one percent of your loan amount and is a form of prepaid interest to the lender. With a 30 year mortgage and paying one point, your rate will be lower by about 0.25%. Now hold that thought.
The lender lowered your rate from a no point loan to a one point loan. Conversely, the lender can raise your interest rate by 0.25% and provide you with a one point credit. If you’re borrowing $300,000 and your quoted rate is 4.25% with no points, the lender might put together a loan with an interest rate of 4.50% and give you a $3,000 credit toward your closing costs.
That’s how a no closing cost loan works. There are costs involved, it’s just that in exchange for a slightly higher rate your lender provided you with a credit to be applied to your costs at the settlement table.
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