Closing Costs: Who Pays for What
There are certain costs associated with obtaining a home loan. You can’t get around them. Even so-called ‘no closing cost’ loans have them. So, if a lender touts a no-closing cost loan, how can the lender claim there aren’t any costs when there always are? There are always costs, it’s just a matter of who pays for them.
For most, borrowers pay closing costs associated with obtaining a mortgage. These costs can be lender fees, title charges, attorney fees, escrow or settlement fees, and others. When first speaking with a loan officer, you can ask for a Loan Cost Estimate which will provide you with a general list of charges, who charges them, and how much. This estimate is typically not the same as what you’ll encounter at your closing, but it will be pretty close. Borrowers are responsible for these charges.
There are regional differences as well. In some parts of the country, it’s the seller that pays for the title insurance policy. In other areas, title insurance is split between the buyer and seller. And, in still other areas, there is an escrow or settlement fee. Finally, in other areas, an attorney will handle the transaction. Your loan officer will walk you through the process.
Okay, but what’s up with the no-closing cost loan? It ends up that you’re still paying them, it’s only in the form of a higher interest rate. For example, you know you can lower your rate by paying discount points, right? Well, conversely, you can select a slightly higher rate and there is enough ‘premium’ that can be applied to some or all of your fees. This is where the no closing cost part comes into play. Lenders will be glad to quote you a slightly higher rate and the lender will essentially ‘pay for’ them. But in reality, you’re paying them in the form of a higher rate.
Such loans are reliant on the loan amount and term, but in general, this is how they work. How much? For a conventional 30-year fixed rate of say 7.06% while financing $400,000, the rate might be adjusted upward by one-quarter of one percent. You can do the math with your loan officer to see if this trade-off is good in your situation.
You can also ask the sellers to contribute to some or all of your fees. Your agent will take care of this for you. Sellers are allowed to pay for your fees, and in many instances, they will agree. This is more common where the real estate market is a little slow and sellers use this to help facilitate the sale.
Ultimately, your settlement charges shouldn’t be much of a surprise. But you do need to do some planning, so you won’t have any surprises when you show up to your closinGg
