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Mortgage Closing Costs Are Rising

Closing costs are rising.

New loan regulations and financial safeguards have increased to bank costs, and banks have passed those costs on to consumers. Bankrate.com says mortgage closing costs are 6% higher as compared to last year.

There are ways to limit what your closing costs, though, and what you'll pay for your loan.

Want to have the lowest closing costs available? Start by avoiding the common mistakes consumers make when shopping for a mortgage.

You, too, can get a great rate.

Mortgage Closing Costs: How They Work

All mortgage loans require closing costs. The costs can be paid by the borrower, by the lender, or by a combination of the two.

Mortgages with which a lender pays all closing costs are known as "zero-closing cost mortgages".

The loan's not free, however.

In exchange for paying costs, the mortgage lenders will raise the mortgage rate for a borrower by a nominal amount - usually 12.5 basis points (0.125%) for a $250, 000 loan size.

With a zero-closing cost loan, fees of both types - lender costs and third-party costs - are paid-in-full.

Mortgage lender closing costs may include such items as origination and discount points; underwriting fees; and, document preparation fees.

Lender fees are summarized in Section 800 of a Good Faith Estimate.

The second type of closing costs - third-party closing costs - are costs paid to companies other than your lender. Third-party closing costs may include appraisal costs, credit report costs, tax service fees, and title insurance.

4 Mistakes That Lead To Unnecessary Closing Costs

However, going zero-cost is just an option. You may prefer to pay your closing costs up-front in exchange for that lower mortgage rate; and closing costs are a part of every loan made.

If you plan to pay closing costs, then, you won't want to overpay. There's no need to pay more closing costs than necessary.

These four tips should help you minimize what's owed at closing.

Don't Overpay On Discount Points

Discount points are a one-time, upfront fee paid at closing which gets a homeowner access to lower mortgage rates than "the market". They're paid as a percentage of your loan size such that 1 discount point carries a cost equal to 1% of your loan size.

A $200, 000 loan with 1 discount point, therefore, would require $2, 000 in "points" to be paid at closing.

For homeowners who plan to keep their mortgage for 7 years or more, paying discount points can be a sensible way to pay a little bit upfront in exchange for longer-term mortgage savings.

For everyone else, points may be wasted cash.

That said, discount points have a secondary effect - they lower your loan's APR. Because of this, lenders will often use discount points as a way to make their rate quotes look more attractive in the marketplace.

One way to reduce your closing costs, then, is to pay the proper number of points for your particular situation, which may actually be zero.

Discount points can be tax-deductible, but they can't be refunded once paid.

Opt For Low- Or "Zero-Closing Cost" When Appropriate

Opposite from paying discount points, mortgage borrowers will typically have the option of doing a low-cost or zero-closing cost mortgage.

With a low-cost or zero-closing cost mortgage, closing costs are paid by the lender on behalf of the borrower. In exchange for paying the fees, the lender will raise the mortgage interest rate for the borrower's loan.

The more costs that the lender covers for the borrower, in general, the higher the increase to the mortgage interest rate.

Low- and zero-closing cost mortgages are appropriate in a number of situations including scenarios in which the borrower plans to move or refinance within the next 36 months or so; or, when the borrower expects that mortgage rates may drop in the future.

Low- and zero-closing cost mortgages are a good way to "step down" with your mortgage rate while the market gradually improves.

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