More Borrowers Seek Help With Higher Closing Costs

Closing costs on a $200,000 loan can average $4,070—an 8.8 percent increase over last year due to higher lender fees, according to a survey by Bankrate.com. In some states, closing costs can be $10,000 or even higher, which has left more home buyers looking for alternatives in covering the high costs of closing.

As mortgage rates hover around record lows, more borrowers are opting for no-closing-cost loans, according to an article at The New York Times. With these loans, borrowers accept a mortgage interest rate that may be anywhere from a quarter to a full percentage point higher than they’d ordinarily qualify for so they can receive a credit toward their closing costs.

The higher mortgage rate can increase a monthly payment for the duration of the loan. Also, the credit on closing costs typically covers fees charged by the lender (origination fee, underwriting expenses, and appraisal), but often doesn’t include the title insurance, mortgage-recording taxes, insurance, and escrow taxes, according to an article at The New York Times.

However, a side-by-side comparison of loans with and without the credit may show borrowers if it may be a good alternative for them in covering the increased closing costs, Neil Diamond, mortgage broker in Commack, N.Y., told The New York Times.

For example, The New York Times article notes: “If you were paying around $50 a month extra in interest charges to cover, say, $6,000 in closing costs, it would take you 120 months, or 10 years, before you began to pay more in monthly payments than you were saving on closing costs.” Therefore, borrowers who stayed in their home for the national average of seven to eight years could come out ahead with the higher mortgage rate using the alternative loan structure, the article notes.

Source: “Handling High Closing Costs,” The New York Times (Oct. 27, 2011)