Reduced Closings Costs
Hopefully this will show how reduced or “No Closing Costs” loans are available. We must start by understanding the value of a loan. Large banks pay lenders a Service Release Premium (SRP) for loans. This amount they are willing to pay for the servicing right of a loan. The SRP will vary based on region of the country or loan amount size or if a borrower is escrowing. A loan is a valuable commodity.
Let us say that the SRP is 1% of a loan amount after all other factors have been figured. For this example we will use a $400,000 loan amount and a rate of say 6%. The SRP would $4,000 for this loan. The typical closing costs are $1800. The lender can sell the loan and pay the closing costs and still have $2200 in the pool. That may cause the lender to offer a client a low or no closing cost loan.
Example number two we will use a loan amount of $150,000 at the same 6%. The SRP would be the same 1% and would pay $1,500. The typical closing cost would be same $1800. The lender could sell that loan but, would end up with a negative number in the pool if the closing cost were paid.
How can we in example two still offer no closing costs? Well the Lender is offering a SRP of 2% if we raise the rate offered to the borrower to 6.25%. That would put $3,000 into the pool and after paying the costs would leave $1200 left for the lender. Both the lender and borrower may be happy with that arrangement.
What is the effect of the higher rate on the loan amount of $150,000? The payment at 6% would be $899.32 P&I and at 6.25% it would be $923.58 P&I. The difference would be about $24 per month or $288 per year. That means it would take 6.25 years to recoup the closing cost of $1800. If the borrower plans on moving in 3 years it may make sense to pay the higher rate.
This is meant as an example of how someone could obtain lower closing costs. Please contact one of our mortgage professionals to discuss your individual situation.
The no closing costs option may not be available in all market conditons. The no closing cost rate will vary based on loan amount size, loan purpose, credit scores, loan to value and property type.
