How to get the best interest rates or closing costs

How to get the best interest rates or closing costs probably isn’t what you think.
Minneapolis, MN: Buying or refinancing a home? What mortgage company should you work with? What lender offers the best interest rate? Sadly, so much of what you see out there is simple advertising smoke and mirrors designed to capture your attention. 
For example, did you realize you can pretty much pick any interest rate or closing costs you want on your mortgage loan?

HOW THE BEST INTEREST RATES WORK

Want a super low interest rate? No problem.  best interest rates

In many cases, you have the option to pay more money upfront in exchange for a lower rate.  Some refer to this as “paying points,” buts that’s a bit of an archaic term.  Self-annointed gurus used to say “never pay points!” But that’s not necessarily good advice.  Discount (or “discount points”) offers a perfectly legitimate and objective choice to pay more money upfront in exchange for a lower interest rate.   Whether or not the trade-off makes sense to you is fairly subjective.  

In the more intelligent conversations, discount is discussed in terms of “breaking even” or “break even months.”  In other words, if I pay extra cash today, how long will it take for me to break even due to lower monthly payments.  Closer to 10 years?  That doesn’t make sense for most people.  5 year or less, however, and it can start to make better sense.  

All this to say that the discount points required to move down to 1/8% are fairly low for most lenders at the moment.  For instance, paying an extra .5% of the loan amount could get you another eighth of a point lower interest rate, and it would take just over 4 years to break even on that extra expense.  Of course, if you plan to sell or refinance in 3-5 years, this makes no sense. If this is the last house and mortgage you want for the foreseeable future, it’s something to consider.  

Lowest closing costs

HOW THE LOWEST CLOSING COSTS WORK

A similar conversation can be had for paying less in closing costs up-front today. You can choose to pay lower closing costs today, but understand this is simply achieved by the lender raising the interest rate you would get.  Small reduction in costs equal small rate increases, while large reduction in closing costs equal large interest rate increases.

This trade off is know as ‘Lender Credits’

So again, what is the math, and does it make sense? A common lower closing cost quote is a “No Loan Origination” quote. On most fixed-rate loans, you can eliminate loan origination costs, which is 1% of the loan amount by roughly increasing the interest rate 1/4%.

On a $200,000 loan, eliminating loan origination would save you $2,000 today, but a 1/4% higher interest rate will cost you $29 more per month on that $200,000 loan. Simple math gives you a 69 month break even period. If you are in the loan less than 69 months, you win.  Each month after 69, you pay an additional $29.

What is the math calculation on your loan amount?

But wait, even this is too simple. Do you have the money today? Do you want to keep some of that money in your pocket today to use for something else? So again,  Whether or not the trade-off makes sense to you is fairly subjective. 

Lower closing costs in exchange for higher interest rates is also a perfectly legitimate tool for home owners.

THE BOTTOM LINE

Don’t fall for advertising gimmicks. Rates way lower than everyone else, you are buying discount points, but may not know it. Anyone offering ‘no lender fees’, rebates, or any other sort of reduced closing costs are simply increasing the interest rate to pay for it.

The bottom line is simply this. A good conversation with a licensed, experienced, professional Loan Officer over your long-term, short-term, payment and equity objectives, is the only way to determine what is best interest rate for you and your situation.


The closing costs are 3% myth debunked

I just heard it again, a Real Estate Agent saying average closing costs to obtain a home mortgage loan in Minnesota are about 3%.

This simply is way too broad a statement about actual closing costs.

As an actual Minnesota mortgage lender for the past 26-Years, the perception that mortgage loan closing cost are about 3% in MN has never been really accurate. This gets spread around primarily because a conventional loan only allows for seller paid closing costs of 3% ( FHA Loan is 6%: VA Loan is 4%, convention is 6% with a large down payment ).

About 1/2 of closing costs are a set cost regardless of purchase price. The other 1/2 of closing costs are based on the purchase price. Take an appraisal for example, a $500 dollars appraisal cost is about 1% of a $50,000 Loan, but only .1% of a $500,000 Loan. Another example is the title company closing fee, which is now around $400. Again, regardless of purchase price., but can make a big difference in the overall cost percentage.

So lower priced homes tend to have costs of 4% to 5% of the price, while upper end homes tend to come in closer to 2% of the price.  Therefore getting 3% seller paid costs falls short of the real costs for many buyers.  These examples assume full closing costs and pre-paid items (taxes and insurance).

To make up the difference, lender can, and commonly offer you other options, like a no loan origination cost lan, or even total no closing costs loans. We also can do something called ‘lender credits’ to reduce out of pocket closing costs. While these options sound great, they are all achieved by increasing the interest rate. Therefore you pay costs over time, versus up-front today.

That is the same when asking for seller paid closing costs. You are paying over time, versus out of pocket today.

Finally, there is absolutely nothing wrong with any of these options. They just need to be understood and analyzed to see what is best for you.  A good Loan Officer will explain and go over all these items once we see a full application, and understand your financial position, amount of cash you have to pay for down payment and more.

Property understanding all these items, then working together with a great agent to property structure your offer will make sure you get a great overall deal on your dream house.

Be sure to ask your Loan Officer plenty of questions, and be sure you carefully pick the Loan Officer who will be handling your largest financial transaction of the average persons life.

If you are buying a home in Minnesota, Wisconsin, or South Dakota… I can be your Loan Officer.  Contact me at (651) 552-3681 or JoeMetzler.com.

 


What are mortgage loan closing costs, and why do I pay them?

Home buyers, especially first time home buyers, commonly fail to understand all the costs involved in buying a home.  Everyone understands down payment, so no issues there. But mortgage loan closing costs are a whole different story.

I often hear potential home buyer comment that they thought they had saved enough for a down payment, only to be blind sided with mortgage loan closing costs.

WHAT ARE MORTGAGE CLOSING COSTS?

All mortgage loans have closing costs. They include appraisal, credit report, state taxes, title company fees, loan origination fees, state deed taxes, and more.  You also have what is known as pre-paid items, which include pro-rated property taxes on the house you are buying, and paying for the first years home owners insurance up-front.

Actual closing costs and pre-paid items can easily range from about 2% to 8% of the sale price of a home, depending on where you live, and the purchase price of the home.

Your Loan Officer will provide you with a detailed estimate of these closing costs based on the actual home once you pick it out, and can give you a good ballpark number during your initial loan review.

TIP: Anyone telling you closing costs are always a certain percentage is flat out simply wrong.

HOW TO PAY CLOSING COSTS

Yes, closing costs can really add up.  If you were planning on a 10% down payment, this means you really need 12% to 18% of the purchase price of the home.  Yikes.

The good news is, the mortgage industry understands this, and allows you to pay closing costs multiple ways.

Option 1) Pay cash out of pocket. Always the best move, but incredibly burdensome for most home buyer.

Option 2) Seller paid closing costs. You simply ask the seller to pay your closing costs for you when making your offer. Depending on the loan program you are using, the seller can pay between 2% and 6% of the purchase price in closing costs on your behalf. While this sounds free, because the ‘seller’ is paying them for you, the reality is the seller isn’t paying anything. Rather, this is a method of you rolling the closing costs into the loan itself.

For example, the seller is asking $200,000 for the home.  You offer $200,000 – but also ask the seller to pay $6,000 of your closing costs. If the seller agrees, many people think they just got free money.  The reality is the seller has accepted $194,000 in their pocket. So you could have bought the house for $194,000, and paid your own closing costs.  Instead you are buying the house for $200,000, and paying closing costs over time, versus out-of-pocket today.

It is a little more obvious to buyers that they are paying over time, when the same seller who wanted $200,000 refuses to budge, but you need closing costs rolled in to lessen your out-of-pocket burden. In this case, you’d restructure your offer to $206,000, and have the seller pay the $6,000 of closing costs.  The seller gets what they wanted, and you rolled closing costs into the loan, again paying over time instead of out-of-pocket today.

Option 3) Lender Paid Closing Costs (also known as Lender Credits). Under this option, the lender will reduce your actual real closing costs by increasing your interest rate. You can choose to increase your interest rate a tiny amount, for a tiny reduction in closing costs, all the way to completely eliminating all of your closing costs with a much higher interest rate.

This isn’t a good or bad option, rather it is a depends option. How much reduction do you need? Do you have all the closing costs money today? How much higher will the payment be?  How long will you live in the home?

TIP: ALL LENDERS HAVE ESSENTIALLY THE SAME TRUE CLOSING COSTS. When shopping lenders, many people will receive a closing cost quote lower than someone else, giving the illusion of a better deal. Many banks and lenders claims things like they give free appraisals, or never charge loan origination fees. No closing cost loans were all the rage a few years ago.

Little do many people realize that all these lenders are doing is increasing your loans interest rate to cover these items, but not telling you they are doing it. They don’t work for free, and someone has to pay the appraiser.  This lower closing cost ploy makes unsuspecting home buyers potentially pick a lender based on a perceived better deal, when in fact, it isn’t. You pay, you always pay. How do you choose to pay? Lower rate = higher costs.  Higher costs = lower rates.

Option 4) Any Combination. This is actually the most common way people pay closing costs. Many ask the seller to pay some, maybe increase the rate 1/8 or 1/4% to pay some, and maybe a little bit out-of-pocket to pay the rest.

CLOSING COSTS – THE BOTTOM LINE

It is very common for many home buyers through these options, to completely eliminate closing costs as an out-of-pocket expense, leaving them with just needing their down payment to buy the house.

So don’t ever let the fear of closing costs keep you from buying your dream home.