Today's low mortgage rates are tempting many homeowners to refinance. However, some borrowers are stopped cold if they don't have the cash for closing costs. Rather than give up on the refinance, consumers should discuss their options with several lenders."Basically, borrowers have three ways to deal with closing costs," says Tim Ross, president of Ross Mortgage in Royal Oak, Mich.
The first option is to pay the closing costs in cash. The other two methods are:
- Roll the closing costs into the new loan.
- Work with the lender on premium pricing.
Rolling costs into loanJean Badciong, chief operating officer at Inlanta Mortgage in Waukesha, Wis., says FHA, VA and conventional loans all typically allow for closing costs to be financed into the loan amount, as long as the new loan amount doesn't exceed the equity in the home.
Lenders generally want consumers to borrow 80 percent or less of the home's current value, including the addition of closing costs to the balance. Some loan programs allow consumers to borrow 95 percent or 97 percent of the home value.
Ross says that more than half of his customers opt to roll their closing costs into the mortgage when they refinance.
"The most critical step in the process is to find out how much value there is in the property," Ross says. "If the value is there and the borrowers have enough equity, then they can simply roll the closing costs into the new mortgage."
Ross finds that borrowers are willing to add a few thousand extra dollars to the balance of the loan in exchange for a lower interest rate -- and, by extension, lower monthly payments.
Adding closing costs to the loan balance will not significantly increase the monthly payments, since the payments for those costs are spread over 15 or 30 years, depending on the loan product.
Premium pricingPremium pricing is another possible option for borrowers who lack cash for closing costs. With premium pricing, lenders pay for the closing costs by charging a slightly higher mortgage rate. This is sometimes referred to as "no-cost" loan.
Brent Mendelson, a senior loan officer with Choice Finance in Rockville, Md., says that in a true "no-cost" loan, the borrower will pay a slightly higher interest rate -- such as 5.25 percent instead of 5.125 percent. The lender then will take the extra premium earned by the higher rate and credit it back to the borrower at settlement to cover the closing costs.
However, borrowers need to be careful, because some lenders use the term "no-cost refinancing" in a misleading fashion, Mendelson says.
"A lot of lenders advertise 'no-cost refinancing,' but what they are talking about is wrapping the closing costs into the loan," he says. "It's pretty typical to wrap the costs into the loan as long as the equity is there, but to me, that isn't a 'no-cost' refinance."
Negotiating costsWhile many closing costs are fixed, some can be negotiated with lenders to reduce the cash needs at settlement.
"Every consumer should shop around among lenders to compare rates and determine what their options are for closing costs," Mendelson says.
Consumers should ask which fees are negotiable, he says.
"Usually bank fees are not negotiable, but sometimes attorney's fees will be," Mendelson says.
In particular, borrowers can save money sometimes if they can find their original title insurance policy and request a reissue rate. In fulfilling this request, the title company reinstates the original title insurance policy instead of creating a new policy, which would require a new title search.
"This can save as much as 40 percent on title insurance fees at the closing," Mendelson says.
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