Understanding mortgage closing costs and banks vs. brokers

While you can get a general idea of what you’ll pay on a home loan using a mortgage calculator, there are still other costs to consider. Buyers often ask me how much they can expect to pay in loan closing costs. I’ve heard Realtors use a rule of thumb of 1%-2% of the loan amount but that is not helpful because loan costs vary so much between different banks, loan products, and buyer situations. The fact is, you can structure a loan in a myriad of ways. If you want to pay ZERO loan closing costs and get a rate that is a bit higher than the market, you can do that. If you want to pay all of your closing costs plus points to get a below-market interest rate, you can do that as well. Or, you can opt for an option somewhere in between, and that’s what most of my clients end up doing. To give you a concrete example, on a recent transaction where our client got a loan of $352,000, they paid $4,596 in closing costs. There was no lender credit involved so they paid all their closing costs out of pocket, got the market interest rate, and did not pay extra to buy down the rate.

Typically my buyers are working with a mortgage broker vs a retail bank. A broker provides value to buyers by matching them with the right loan structure based on their situation. For example, if the buyer says this is my forever house-I’m going to be here probably 20 or 30 years. In that case, they will likely want to pay all of their closing costs and maybe even buy down the rate if they have extra cash available. On the other hand, if a buyer says, I may be in this house 5 years max. The lender might recommend a higher interest rate which comes with a lender credit that can be used to pay closing costs which reduces the amount of cash you need to close. Depending on the loan, the lender credit may be high enough to pay all of the closing costs. Since the buyer will only be there for 5 years, the higher rate and lower upfront cost may end up being cheaper than paying for a lower interest rate. A good lender will have a spreadsheet showing you how long you’d have to hold the mortgage to justify paying all your closing costs vs opting for the lender credit based by factoring in the difference in interest rate.

Have more questions about buying a home in Northern Colorado? Please don’t hesitate to contact Grey Rock Realty.