How To Get A Zero-Cost Mortgage In The Middle Of A Refi Boom

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Mortgage rates are stupid low and that’s why this is a Refi Boom. But when it comes to refinancing your home — or buying one — there’s more than rates to focus on.  You’ve got to watch fees, too, and depending where you live, closing costs can be expensive.

What Are Mortgage Closing Costs?

Mortgage “closing costs” is the sum of all charges related to a new mortgage.  In general, these charges are grouped into two categories, labeled on a Good Faith Estimate as “Origination Charges” and “Third-Party Fees”, respectively.

The category “Origination Charges” includes any fee paid directly to the lender at the time of closing.  Origination Charges include costs such as underwriting fees, application fees and processing fees. It may also include origination points, discount points, and broker fees.

These individual elements have different names from lender-to-lender so don’t get hung up on what they’re called. Origination Charges are fees paid to the lender.  Period.

By contrast, “Third-Party Fees” are fees paid to parties other than the lender.  Third-party fees include the costs of appraisals, credit reports, settlement fees and title searches.

When comparing mortgages, third-party fees should usually be ignored. This is because most third-party fees are fixed-price offerings with little room for variance (i.e. government stamps, recording fees). Because they’re fixed-fee, these types of costs will be identical no matter which lender with which you choose to work.

As a side note, escrow reserves and per diem interest are not closing costs. They are “prepaid items” and do not apply to a discussion on closing costs.

Closing Costs Aren’t Necessarily Higher, Just More Accurately Disclosed

According to its annual Closing Cost survey, Bankrate.com shows typical closing costs around the country higher by 37 percent from 2009.  That’s a huge jump, but the breakdown is even more revealing.

Versus 2009, origination charges are up 23 percent to ,463.  Third-party fees, on the hand, are up 47 percent.

There’s several reasons for the disparity and most of it ties back to government regulation that went into effect January 1, 2010.

As part of the amended Real Estate Settlement Procedures Act, loan originators are now bound to the accuracy of their respective Good Faith Estimates.  To protect consumers from low-balled Good Faith Estimates and worse, the law slapped a 10% tolerance zone on most fees quoted therein.

If the “final” fee varies by more than 10% from the original “estimate”, the loan originator must absorb the cost. The “mistake” cannot be charged to the borrower.  This change has spurred loan officers to get more accurate with their GFEs which may be one reason why charges appear to be higher — especially the third-party ones.

In the past, it was common to see mortgage companies purposely understate third-party fees to make their own Good Faith Estimates look more attractive.  That’s not possible now.

A second reason why closing costs appear higher is that RESPA reform also requires new levels of disclosure and compliance and these changes come at a cost to the banks.  The costs are being passed on to consumers in the Origination Charges section.

In other words, it’s not that closing costs are necessarily higher by 37 percent as Bankrate.com is telling us.  What’s more likely is that costs are up modestly, and are more accurately disclosed.

How To Reduce Your Closing Costs

The good thing about closing costs is that they’re negotiable, in some respects.  You can’t avoid paying underwriting fees or taxes to the government, for example, but you can arrange to have loan costs paid on your behalf.

It’s called a “zero-cost mortgage”.

A zero-cost mortgage is exactly what it sounds like — it’s a mortgage in which all closing costs are paid by the lender instead of the borrower. Loan sizes don’t increase and nothing is “rolled in”.  It’s a true no-cost loan.  However, there is a trade-off.  In order to have your closing costs waived in full, you’ll be asked to accept a higher mortgage rate than the “market” rate.

For larger loan sizes, the bump to interest rate is usually about a quarter-percent; for smaller sizes, it’s about a half.

Zero-cost mortgages are excellent in a falling interest rate environment because they limit sunk costs to zero, and because they offer an immediate payback.  Not every bank will offer them, though.  Waterstone Mortgage does.

If you’d like to see the math on a zero-cost mortgage, . I’m happy to talk to you about it.

Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.