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New loan regulations have increased within the past year, which in turn have raised closing costs. Closing costs are required by all types of loans and is paid by the borrower, lender, or a combination of the two. Zero-closing cost loans typically come with higher rates, that is why some people opt to pay the closing costs in trade for lower mortgage rates. There are ways in which you can lower your costs by avoiding common mistakes consumers make. You can grab a super lower rate and avoid high closing costs with these 4 tips.
Don’t overpay on discount points
Discount points are a one-time, upfront fee paid by the homeowner in order to receive a lower than market mortgage rate. They are paid as a percentage of your entire loan size, one discount point equals one percent of your loan. For example, on an $800,000 loan, one discount would be 8,000 points. If you’re a homeowner planning to keep your home for more than seven years, this is a great opportunity to pay a bit more upfront in exchange for long-term mortgage saving. For others, this can be a waste of money. Discount points do have secondary effects, they lower your loan’s APR. Lenders will often use discount points to make quotes look more attractive because they know consumers shop loans by APR, even though they shouldn’t. In order to reduce your closing costs, you must pay the proper amount of points for your situation. Discount points are tax-deductible, but are not refundable.
Opt for low or “no closing costs” when appropriate
Borrowers typically have the option of choosing a low-cost or zero-closing cost mortgage. With these types of loans, the closing cost is paid for by the lender on behalf of the borrower. In exchange for paying the fees, the lender will raise the interest rates on the loan. The more the lender covers of the cost the higher the interest will be raised. These types of loans are appropriate for a couple different types of scenarios, such as, if the homeowner plans to sell the home or refinance within 36 months or they believe mortgage rates will drop in the near future.
Choose the proper loan type for your needs
There are many different types of loans designed to meet the needs of different types of homeowners. Borrowers can choose between conventional loans, FHA loans, VA loans, USDA loans, jumbo loans, and more. For example, FHA loans are best for borrowers who may not have stellar credit or enough funds for a down payment. VA loans, on the other hand, are best for homeowners with a military background and want to put little to nothing down. Conventional loans are for people who wish to put down 20 percent. USDA loans are fit for homeowners in more rural areas of the country. Each loan does have its own set of closing costs, so be careful when choosing one.
Choose a realistic rate lock for you loan
Another way to reduce closing costs is by locking in your mortgage rate for the appropriate amount of time. Rate lock timeframes are typically 15-day increments to 60 days and then 15 to 30-day increments from there. Lenders do charge more for longer rate locks, so homeowners would be paying more for a 60-day rate lock than a 30-day lock. Lenders also charge fees for “blowing” a rate lock. Blowing a rate lock requires a rate lock extension, which carry high costs. It would be more expensive to extend a 15-day rate lock by 15 days then it would be the select a 30-day rate lock. You can keep your closing costs low by selecting the right rate lock on your loan.
Choosing the correct loan for your situation is important because it can either increase your cost of homeownership or lower your benefits of refinancing. Let B Squared Funding help you find a super low rate and loan that is right for you.