MenuWHY PAY LENDER CLOSING COSTS?
Why pay lender closing costs?
When most clients are looking for a new mortgage, they mainly focus on getting the lowest interest rate. You should consider the total loan package:
• Interest Rate (note rate)
• Total lender closing costs
• Is there a pre-payment penalty
• Is the interest fixed or adjustable
• How long is the interest rate locked in
• How fast can your lender close on the loan
• Total title fees
I’m asked many times by clients what’s the best loan program? The answer depends on your situation. For example, if you have 20% down but you don’t have any additional cash for closing costs it may be in your best interest to do the following. The same example applies if you stay in your new home less than 10 years.
Have the lender increase the note rate of the loan by 0.125% to 0.25%. By doing so the lender may receive enough yield spread premium (YSP) or service premium. What the lender makes more than just the loan origination fee? Yes they can. The YSP or premium is made by increasing your note rate of your loan. For example, if today’s PAR rate (PAR is no YSP) is 4.25%, the lender could increase the note rate to 4.50% and pay all of your closing cost.
Another thing to consider, if you are purchasing a home for $350,000 putting 20% down so there is no mortgage insurance and the PAR note rate is 4.25%, your principal and interest payment would be $1,377.43 per month for 30 years. If you increased the note rate to 4.5% and had the lender paid all of your closing costs (estimated at $6,710) the payment is $1,418.72 per month. That is only $41.29 more per month.
Now, take the closing costs ($6,710) divided by the increase in payment ($41.29), it would take 13.5 years before it would make sense to pay closing costs versus increasing the note rate. Most of my client move between 5 and 8 years into another home. Bottom line, if you’re not staying in your new home longer than 13.5 years then have the lender increase the interest rate.
Ask your lender the following:
• What is the note rate if you pay all closing costs?
• What is the note rate if the lender pays all closing costs?
• Have the lender increase the note rate by .125% and see how much the closing costs drop.
Keep in mind that the information above is for illustrative purposes only, rates may change at any time and closing costs and rates vary by each lender. Also your mortgage payments also include Principal, Interest, real estate taxes and insurance (PITI). The above we only talked about P&I however the savings would be the same.
Please don’t hesitate to contact me if you have any questions or comments.
Douglas Hauck 303-400-0472 doug@DouglasHauck.com
When most clients are looking for a new mortgage, they mainly focus on getting the lowest interest rate. You should consider the total loan package:
• Interest Rate (note rate)
• Total lender closing costs
• Is there a pre-payment penalty
• Is the interest fixed or adjustable
• How long is the interest rate locked in
• How fast can your lender close on the loan
• Total title fees
I’m asked many times by clients what’s the best loan program? The answer depends on your situation. For example, if you have 20% down but you don’t have any additional cash for closing costs it may be in your best interest to do the following. The same example applies if you stay in your new home less than 10 years.
Have the lender increase the note rate of the loan by 0.125% to 0.25%. By doing so the lender may receive enough yield spread premium (YSP) or service premium. What the lender makes more than just the loan origination fee? Yes they can. The YSP or premium is made by increasing your note rate of your loan. For example, if today’s PAR rate (PAR is no YSP) is 4.25%, the lender could increase the note rate to 4.50% and pay all of your closing cost.
Another thing to consider, if you are purchasing a home for $350,000 putting 20% down so there is no mortgage insurance and the PAR note rate is 4.25%, your principal and interest payment would be $1,377.43 per month for 30 years. If you increased the note rate to 4.5% and had the lender paid all of your closing costs (estimated at $6,710) the payment is $1,418.72 per month. That is only $41.29 more per month.
Now, take the closing costs ($6,710) divided by the increase in payment ($41.29), it would take 13.5 years before it would make sense to pay closing costs versus increasing the note rate. Most of my client move between 5 and 8 years into another home. Bottom line, if you’re not staying in your new home longer than 13.5 years then have the lender increase the interest rate.
Ask your lender the following:
• What is the note rate if you pay all closing costs?
• What is the note rate if the lender pays all closing costs?
• Have the lender increase the note rate by .125% and see how much the closing costs drop.
Keep in mind that the information above is for illustrative purposes only, rates may change at any time and closing costs and rates vary by each lender. Also your mortgage payments also include Principal, Interest, real estate taxes and insurance (PITI). The above we only talked about P&I however the savings would be the same.
Please don’t hesitate to contact me if you have any questions or comments.
Douglas Hauck 303-400-0472 doug@DouglasHauck.com
