There are many variables when considering mortgage closing costs on your mortgage loan. Essentially if you want the best interest rate possible, then there is simply no way around paying them. In our case, the only "out of pocket" costs is for the cost of the appraisal (paid directly to the appraiser).

The remaining closing costs can be made to be part of your loan, which will, of course, increase your loan amount. You, of course, always have the option to pay the additional closing costs directly at the loan closing which would save finance charges on the closing costs over the term of the loan. Here is a list of typical closing costs on any mortgage loan:

• Title insurance
• Escrow and closing fees charged by the title company closing your loan
• Loan Origination fee - varies by loan size
• Processing Fee
• Lenders Fees - vary by lender
• Appraisal
• Credit Report Fee

We will provide you with a Good Faith Estimate of Settlement Charges either via email, fax, or by mail which will detail these costs to your particular loan and we certainly recommend obtaining one from any mortgage broker and/or lender prior to proceeding with any mortgage loan.

If you desire either a lower closing cost or even a zero closing cost loan we certainly have those available as well. Keep in mind that the thought process behind a lower or zero closing cost loan really dictates that you look carefully at the interest rate being offered and compare it to the Truth in Lending document, which states your APR, before you make the decision to proceed with a lower or zero closing cost loan. The bottom line is that you ultimately end up paying a higher interest rate on a zero closing cost loan, but depending on the loan size, you may end up with a lower APR utilizing the standard closing cost scenario which will probably end up saving you more money in the long run. Of course, it depends on your individual circumstances as to which is the better way to go, but typically, if you plan on keeping your house for an extended period of time then chances are you will save more money paying the standard closing costs.

The best way to decide whether you should pay points or not is to perform a break-even analysis. This is done as follows:

Calculate the cost of the points. Example: 2 points on a $100,000 loan is $2,000.

• Calculate the monthly savings on the loan as a result of obtaining a lower interest rate. Example: $50 per month
• Divide the cost of the points by the monthly savings to come up with the number of months to break even. In the above example, this number is 40 months. If you plan to keep the house for longer than the break-even number of months, then it makes sense to pay points; otherwise it does not.

The above calculation does not take into account the tax advantages of points. When you are buying a house the points you pay are tax-deductible, so you realize some savings immediately. On the other hand, when you get a lower payment, your tax deduction reduces! This makes it a little difficult to calculate the break-even time taking taxes into account. In the case of a purchase, taxes definitely reduce the break-even time. However, in the case of a refinance, the points are NOT tax-deductible, but have to be amortized over the life of the loan. This results in few tax benefits or none at all, so there is little or no effect on the time to break even.

Whatever happened to the conventional wisdom of waiting for the rates to drop 2% before refinancing? You have a 30-year fixed loan at 8.5%. A loan officer calls you up and says they can refinance you to a rate of 8.0% with no points and no fees whatsoever.

What a dream come true! No appraisal fees, no title fees and not even any junk fees! Is this a deal too good to pass up? How can a bank and broker do this? Doesn't someone have to pay? Whose money is being used to pay these closing costs?

No––this is not a scam. Thousands of homeowners have refinanced using a zero-point/zero-fee loan. Some refinanced multiple times, riding rates all the way down the curve in 1992, 1993 and, more recently, in 1996. Some homeowners used zero-point/zero-fee adjustable loans to refinance and get a new teaser rate every year.

The way this works is based on rebate pricing, sometimes also known as yield-spread pricing, and sometimes known as a service-release premium. The basic idea is that you pay a higher rate in exchange for cash up front, which is then used to pay the closing costs. You will pay a higher monthly payment––so the money is really coming from future payments that you will make.

You can also think of this as negative points! For example, a 30-year fixed loan may be available at a retail price of :
8.0% with 2 points or
8.25% with 1 point or
8.5% with 0 points or
8.75% with -1 point or
9% with -2 points

On a $200,000 loan, the loan officer can offer you 8.75% with a cost of -1 point, which is a $2,000 credit towards your closing costs. A mortgage broker can use rebate pricing to pay for your closing costs and keep the balance of the rebate as profit.

What are the benefits of a zero-point/zero-fee loan?
The main benefit is that you have no out-of-pocket costs. As a result, if the rates drop in the future, you could refinance again even for a small drop in rates. So if you refinanced on the zero-point/zero-fee loan to get a rate of 8.75% and if the rates drop 1/2%, you can refinance again to 8.25%. On the other hand, if you refinanced by paying 1 point and got a rate of 8.25%, it may not make sense to refinance again. Now, if the rates drop another 1/2%, a zero-point/zero-fee loan can drop your rate to 7.75%, whereas if you paid points, you may have to do a break-even analysis to decide if refinancing will save you money.

The zero-point/zero-fee loan eliminates the need to do a break-even analysis since there is no up-front expense that needs to be recovered. It also is a great way to take advantage of falling rates.

Some consumers have used zero-point/zero-fee loans on adjustable loans to refinance their adjustables every year and pay a very low teaser rate.

What are the disadvantages of a zero-point/zero-fee loan?
The main disadvantage is that you are paying a higher rate than you would be paying if you had paid points and closing costs. If you keep the loan for long enough, you will pay more––since you have higher mortgage payments. In the scenario where you plan to stay in the house for more than 5 years, and if rates never drop for you to refinance, you could wind up paying more money. If, on the other hand, you plan to stay at a property for just 2-3 years, there really is no disadvantage of a zero-point/zero-fee loan.

Top of Page