Closing costs -- HOW MUCH???

Question

Got a question -- have a family member who is looking to purchase a rental from someone she knows, and is seeking to refinance her own home. Her lender is supplying terms for the rental property which... simply put I don't think any sane person would agree to. It takes a property which is under-priced by about 15% and converts it over to a negative cashflow nightmare for the next 12 years. I am telling them to avoid that deal like the plague, although I have no idea where to suggest alternative financing.

As for her own property, they are willing to refinance her at a slightly lower interest rate, and switch it over from 26 remaining years to 15 with lower monthly payments.  The savings are nice--the kicker is she must pay $5K of closing costs up front to refinance. Mind you, this is property she already owns, and is living in. They want $5K certified check up front to close on her house she is already living in.

I can't get past the point that her own lending institution is charging her $5K up front for closing when closing is nothing more than telling their computer system to drop her rate a smidgen.

Am I being unreasonable, or are they?

Tom Gimer · Answer

"we are back to the closing fees are paying $4,957.00 for the note holder to switch the interest rate and term to different numbers in their computer system"

Here is the disconnect. Refinancing involves a new loan, underwriting, note, title, mortgage, etc. ... not a few keystrokes.

Russell Brazil · Answer

$28 for the first 2 pages....$8 per page after that, plus $20 each document. A 100 page mortgage then would be $832 on just the recordation fee of the mortgage.  Still need lenders title insurance. Even though it is the same "bank", the money is coming from different investors. So you are borrowing a new investors money to pay off the old investors.  You can typically get a discount on title insurance if you have a copy of the old policy, but its not a huge discount by any means. Loan officer still needs to be paid, underwriters still need to be paid.  New deed needs to be prepared to record the new lien holder.

If you want to borrow someone elses money, there are costs involved. People dont work for free.

Stephanie Medellin · Answer

@Darrell Crosgrove  Do you have a copy of the loan estimate to post?  (with any personal info blacked out)

There is prepaid interest (from closing date to the end of the month), interest on the old loan until it's paid off, possibly a new escrow account for taxes and insurance, credit report fee, appraisal fee, title insurance (yes even though title is not being transferred there is always a new lender policy issued).  I don't know if there are additional local charges that apply in Ohio such as a mortgage tax.  Closing costs don't always go to the lender - often they are 3rd party fees or fees that are not "profit" to the lender.

As many other people said, usually the closing costs are financed unless there just isn't enough equity to make the numbers work.  Part of the $5,000 could even be used to reduce the principal to get the loan under a certain LTV.  Hard to say without seeing anything on paper.

Darrell Crosgrove · Answer

A 100 page mortgage on a $100K house?

Title insurance? As I said, the house is not being transferred. If the deed was good yesterday, it is the same deed today--the lender is getting PRECISELY the same title they had yesterday, last week, and last year.

And, everything else you said boils down to PRECISELY what I said--the mortgage company is generating a lot of fees IN ADDITION TO their advertised interest rate. Can you imagine going into a gas station with a sign out front saying gas was $2.59 a gallon, and when you went to pump the gas you first had to pay a $15.00 fee for using their pump, an $8.00 "lot fee" for parking you car in front of their pumps on their property, a $17.00 "roof" fee because there is an awning over the pumps, and a  $14.00 "snack bar" fee to cover the fact that should you feel the need for a cool refreshing beverage, you have the option of walking in and purchasing an Icee for $1.99?

Yes. I know. When you wish to borrow someone else's money, you have to pay for the right to do so.

I mean, seriously, you felt a compelling need to state that?

What I object to is the fact that these "closing costs" have nothing to do with actually borrowing money. What they are is an EXTRA fee on top of the interest that you pay.

And, this also explains why so many people are heavy into alternative forms of financing. Paying someone $5K up front plus the interest they charge takes good deals and makes them into bad deals. You are taking the price of every property and increasing the cost of it by $5,000 without adding a penny of value.

I mean, let's leave it at this: you think those closing costs are great--which is your right. I think those closing costs--at least in a situation like this--is a fool's wager.

What I have done is advised my relative to make copies of her financials and the note/property info and shop around for a (much) better deal.

Dave Skow · Answer

an option to lower costs would be to consider  slightly higher rate …...title ins is likley needed to provide assurance and insurance no liens have been placed on title since the last loan was made ...if they are asking for funds upfront , before the loan closes - do not use them  ...if the costs are to be paid at closing - this is standard ….she should be able to  roll  any costs into the new loan if there is  ample equity

Darrell Crosgrove · Answer

Mortgage Redecoration Fee in Lucas County: $28.00

Lender Fee: Same lender, and their fees are supposed to be taken out of the interest they charge. In any other industry this would be known as deceptive advertising because their advertising mortgage rate is part of a bait-and-switch.

Title Attorney Fee: As title is not changing hands, this is not needed.

So, aside from the $28.00 fee paid to the county recorder, and the $15.00 paid to the runner to record it (assuming there is no discounting as yours is the only mortgage being recorded that day) we are back to the closing fees are paying $4,957.00 for the note holder to switch the interest rate and term to different numbers in their computer system.

I mean, seriously, how much time are we talking for the paperwork prep needed to do a refinance with the same lender? I am assuming they are computerized, and not using typewriters and mimeographs to produce the documents, so...  20 minutes?

Further, if the refinance was included in the mortgage and the rate dropped enough to where the term or the payments dropped, thus dropping the overall costs, they that would make sense to do. However, with the $5K fee charged upfront, one must look at the payback period and add in the lost NPV that $5K has hidden inside (ala lost opportunity costs). Even a quick ballpark of the numbers they were giving her meant a payback period of almost a decade without the NPV factored in.

I told her not to do it.

It would make more sense to take that 5K "closing cost" and drop it into paying off the current note's principal. It would trim about $9K off of her total interest payments.

I am starting to think that lotteries are not the only tax on people who can't do math--so are banks.

Russell Brazil · Answer

Typically you add the costs to the loan balance, but closing costs arnt any cheaper on a refinance. Mortgage recordation taxes, lender fees, title attorney fees etc.

Chris Mason · Answer

(1) That's highly unusual, unless she is short on equity. Industry standard SOP, assuming there is equity, is to finance the closing costs into the loan balance.

(2) That's not really the case at all. Refinances are a full fresh complete re-underwrite comprising 95% of the same work/paperwork that a purchase mortgage involves, assuming of course the consumer wants the Fannie/Freddie subsidized rates.

James Caruso · Answer

Sounds about right, from my understanding refi closing costs are typically 3+% depending on state/county. National average is about $4900

Closing costs -- HOW MUCH???

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