Closing Costs Associated With Your Mortgage

Yesterday, mortgage backed securities (MBS) traded in a tight range and closed near the previous day's closing price levels.   This stability will allow lenders to offer par 30 year conventional mortgages ranging from 4.625% to 4.875% depending on individual borrower risk profile characteristics

 

To qualify for a par interest rate requires a FICO score of at least 740 with a loan amount to home value ratio of 80% or less. This also assumes

 that borrowers pay all closing costs which includes 1 origination/discount point or broker charge.  I bring up this topic due to a recent conversation I had with a client. 

This client sent me an email indicating they had been quoted a specific zero point mortgage rate, as is the usual reaction to such a statement I requested that they please send me their good faith estimate.  Sure enough, there were no points; however, upon further inspection I noticed a 1.00% closing cost labeled "broker fee"(see example below). So although the "fees" were not described as "points", this client was still paying the same amount. Consumers beware of how lenders structure your good faith estimates. 

 

 

That said, I am not bashing the added cost of origination or discount points but I would like to point out that these "points" and "fees" should go towards a lower rate.   Depending on the situation, I usually encourage everyone who is refinancing to request a zero point/fee mortgage rate and a 1 point mortgage rate.  If you are staying in the home for more than 3 years, paying the point and securing a lower rate will pay for itself and more than likely be the better deal. 

You are able to determine this break even point by calculating the difference between the two mortgage payments (0 point vs. 1 point quote) and comparing to the cost of the "points/fees" that you pay.  If you save $100/per month divide that savings by the dollar amount of points you pay to determine the number of months it will take to make up the cost of "points/fees". If you believe you will be in house for a period longer than it takes to recover this cost...I would suggest paying the point in favor of a lower rate.

 

I also had a client comment yesterday about an offer they received on a refinance where the lender was "absorbing the costs".  Well, it appears that way on the surface when you get a good faith estimate that shows the lender paying all the fees; however, the rate they were quoted was abnormally higher than the average market par rate.  So, is the lender absorbing the costs, or is this consumer paying the costs via a higher interest rate?  If the latter is the case the consumer will pay more money in the long run vs. paying costs up front.

Another client, said they heard a commercial offering a 4.375% rate ...  the APR was 4.875%.  In this particular case, guess what this means?  You would be paying anywhere form 3-4 points and closing costs.  Pay attention to the APRs, they tell whole story.    You can get a 4.375% but it might cost you some points.