April 29, 2019
Everyone has heard the ads on the radio or TV, "no closing costs..." Orion’s brokers know that all real estate and mortgage transactions have costs, and someone is paying them. Some companies disguise things, in effect taking the costs and giving borrowers a higher rate. But this does raise the question, “Does it have to be the borrower, or can someone else pay them? Like the broker?”
Our experienced brokers teach their clients that closing costs are different for purchase transactions and refinance transactions, typically costs for purchases are higher due to the escrow and title fees being higher than for a refinance. If a transaction is a refinance there are two options for closing costs to be paid, if your client is purchasing a new home, they have those two options plus one more.
The first option is the most obvious one, the borrower pays the closing costs. In a refinance, one usually can add them to the new loan, which means the client will be paying the costs over the life of the loan. If they are purchasing a home it does not make sense to add them to the loan amount as it would change the down payment, and that would change the loan to value, and that could change the rate. For most refinance transactions, brokers often encourage clients not to add the recurring costs for interest, insurance and taxes to their loan balance so they are not paying interest on those fees they would be paying whether they refinanced or not.
The second option is for the lender to pay the costs. This option occurs very frequently in refinance transactions with a "no points" transaction and the other costs are either paid by the borrower or added to the loan. A lender can pay part or all the closing costs for clients in a refinance or purchase transaction, on paper. The borrower is paying for the closing costs through a higher interest rate. The higher the interest rate, and therefore the payment, the lower the costs to close. This is because the higher rate NLC, or any lender, has on a mortgage the more money it can sell that loan for in the secondary market.
The third option, available for those purchasing a property, is to have someone else involved in the transaction pay some or all the costs for your client, most typically the seller. If a borrower was planning on putting 10% down and covering all the closing costs, this money will be paid by the borrower upfront. If, however, one “adds” those same costs to the original sale price of the home they want to purchase, know that your client writes their offer to the seller for the original sale price plus the amount they would have paid upfront. The seller then pays, in the form of a seller credit, those initial upfront fees; your client will “payback” the money they did not pay at closing over the course of loan. Yes, your client will pay more for the property, but the additional money would not be paid in one lump sum at the start of the loan but rather paid throughout the life of the loan.
Like most mortgage questions there is no simple answer to whether your client should pay the closing costs of the transaction, it depends on their situation and what makes them the most comfortable in trading off costs and payments. This is exactly where good brokers shine: Helping your clients understand these decisions.