Home Loan Closing Cost Explained

  I would like to begin by debunking the number one myth out there concerning home loan closing cost. "No Closing Cost Loans" do not exist. This is a marketing gimmick designed to make mortgage holders pick up the phone. On a "no closing cost" loan you will simply pay a higher rate on your mortgage and the lender pays the fees for you. Ask yourself these questions:

• Do I know an attorney who works for free?
• Do I know an appraiser who works for free?
• Can I get the State and County to waive their fees?
• Will my lender work for free.... you get my point.

It has been said, that in business, if we were able to extract all of the wisdom from all of the world's top business minds and put it into one sentence that sums up the entirety of their knowledge it would read "there aint no free lunch"! This holds true in the mortgage business. If the cost are not paid by you they are paid by the lender, period. All lenders sell their loans (Yes even the ones that you think do not sell them). So the thought that they can hold the loan and make money to cover the closing costs doesn't fly either. They rarely hold loans a year...if that.

This is called "securatizing", where the lenders sell blocks of loans worth hundreds of millions of dollars to other investors so they can free up capital to loan more money. Some lenders sell these loans with "servicing retained" or "servicing released". Meaning they keep taking the payments or someone else takes over. More than half the time the bank that you make payments to doesn't own your loan anymore, they just retained the servicing when they sold it.

Have you ever wondered that when you call your mortgage company to see if they can give you a lower rate they make you re-qualify and jump through hoops all over. More closing costs and all the hassle. You would think that if they wanted to keep you as a customer they would just lower the rate and lets move on right? The truth is, it's not their loan to lower ... they just service the loan. But I digress.

In order to compare home loan closing cost from lender to lender we must make sure all lenders are on the same playing field. The document that spells out the closing cost on a loan is called the "Good Faith Estimate" (GFE). This is a standard RESPA document and should not vary among lenders. Never accept what a lender tells you concerning closing cost unless it is on a GFE and in your hand.

Please open the link above labeled "Good Faith Estimate". I want you to notice in the main body of the document that each section of fees is broken down into categories. Each of the categories are given a numerical value to the left of them. These categories are labeled from 800 - 1300 in blocks. I have included a provided a quick breakdown of each of the fees and sections here.

The thing to know when comparing home loan closing cost is that the expenses for 5 out of 6 of the sections (900 - 1300) will be identical regardless of who which lender you use. The 800 block of fees are the only fees the lender has direct control over. So when comparing closing cost between lenders they are the only ones that need to be considered.

I know a lot of LO's that will "skimp" on the third party fee's in order to have their closing cost appear cheaper during the initial review. When closing time comes around they will use the excuse "those aren't my fees" to explain the higher cost. So when comparing lenders home loan closing cost ignore the third party cost, but look at all the cost to have an idea of the amount of money you are about to spend.

Lets talk about the 800 block of lender fees. All lenders will have "junk fees"built into this section. These are fees that represent the overhead and profit of the lender. In fairness, they do have to employ closer's, funders, processors and if they are a lender underwriters. The junk fees range from $500 to $1500 and are usually put under the headings:

• 805 - Lender's Inspection Fee
• 808 - Mortgage Broker Fee
• 810 - Processing Fee
• 811 - Underwriting Fee

If you ask the loan officer about these fees they will explain that they represent the companies overhead and do not represent a profit. The truth is they do represent overhead for the company and a profit for the owners, not the LO. The loan officers are not commissioned on the junk fees. However as a savvy shopper you should consider them in your final decision making process.

The sections of the 800 block of fees that represent a profit for the LO is the origination fee and the discount fee. Discount was originally designed to offer a buy down for the borrower. However most lender will sneak some profit into this and tell you you are buying down the rate. This is why it is so important to find the par rate before negotiating.

On our mock rate sheet all of the rates that the pricing falls below 100.00 represent a cost. So if the price on the rate sheet shows 99.55 like it does for the rate 5.875% you should expect to pay 0.45% of the loan amount in discount. Ask your lenders what their "par rate" is. The worst you will get is a lie, the best is the truth. Ask a few lenders and compare their answers with what is online. At the end of the day you should be pretty close.

95% of the time the lender/ loan officer will put their profit in the origination fee. It is usually expressed as a percent of the loan, i.e. 1% 1.5% depending on the loan size. Review the profit chart on the last page for an idea of what most lenders are shooting for in profit. In our next section we will discuss how to structure your rate and closing cost.