When structuring a mortgage home loan there are four ways to pay for the mortgage closing costs:
- pay cash at closing,
- roll the costs into the loan,
- increase the interest rate,
- a combination of the aforementioned methods.
When lenders offer “no cost” loans or “low costs” loans they are either rolling the costs into the loan and/or rolling the costs into the interest rate.
How to Pay For Mortgage Closing Costs
There are technically three ways you can pay for closing costs. These methods can pay for all your Closing Costs and Prepaids. The only thing these cannot pay for is your down payment.
Combination Of All Three
You can use any combination of the three aforementioned methods to pay for your closing cost. For example, you can have a lender credit that covers some costs, the seller could pay for some costs via concessions, and you can then write a check for the remaining balance.
Pay Cash At Closing
Technically you can’t bring cash to closing; instead you need to bring a check, certified funds, do a wire transfer, etc. Watch our Closing video for the proper methods for paying costs at closing.
Roll Costs Into The Loan
For refinance home loans you can increase the loan amount (assuming there’s room in the LTV) to pay for the closing costs. For purchase home loans the Seller Concessions are used to “roll the cost into the loan.” With today’s interest rates the monthly payment changes by approximately $5 to $10 for every $1,000 that is rolled into the loan on a 30-year mortgage.
Shopping for a mortgage when purchasing or refinancing a home can be a complicated process. Borrowers want the lowest rate, the lowest costs, and a pain free experience – and who can blame them? However, contrary to popular belief taking the lowest interest rate may not always be the best option and could cost you money in the long run. When securing a home loan you may want to consider Premium Pricing.
There are three factors to compare when shopping for a home loan:
– Interest Rate
– Origination Fee
– Points and/or Lender Credits
Contrary to popular belief, putting the most emphasis on the interest rate may not be the cost-effective strategy. By taking a higher interest rate a lender credit may become available which reduces the Closing Costs for loan. This strategy is call “Premium Pricing.” For example, let’s say that instead of taking a rate of X on a mortgage someone took a rate of X + .25% which increased the P&I payment by $50 per month AND doing so provided them a lender credit of $4,200.
In this example the borrower won’t “feel” the higher rate for 7 years (4,200 credit / 50 per month = 84 months = 7 years) AND that 7 year break-even could be longer when considering the Mortgage Interest Tax Deduction. This means that if the borrowers anticipated selling, refinancing, or paying off the mortgage within a seven year time period then they should take the higher rate since the extra $50 per month won’t add up to the $4,200 in credit. In some cases, many folks just prefer keeping the $4,200 in their pocket at closing and aren’t concerned with the slightly higher payment regardless of how long they have the mortgage.
Seller Co may be right for you.
Gift of Equity
Loan Officer, NMLS # 729612