The Secret Behind Points And Closing Costs: Welcome To Part 3
Welcome back to the series. In the previous edition we have covered different secrets behind points and closing costs. Some of things you may have known, some you may not have known, and then some you have heard but did not understand.
If you have not read part 2, I recommend clicking here, The Secret Behind Points And Closing Costs, because the secrets will build upon each other.
With that out of the way, let us continue with the series and uncover more secrets.
The industry has gone beyond avoiding ‘points’. They’re actually avoiding the origination as well. Again, the origination is the first 1% and most people mistakenly refer to it as a point, even though it’s technically different.
Anyway, the industry’s been marketing ‘zero point’ loans for a few years already and most people jump at it, thinking they’re saving money.
The Secret Behind Points And Closing Costs: Look At The Numbers
Well, the same math is true for the first 1% as for the second or even the third. If you’re not paying the 1% origination as a closing cost, rest assured, it’s hidden in a higher interest rate.
Nobody’s doing loans for free out there and most banks have a minimum 1% origination anyway so you’re paying for it one way or another.
The reason this works is because Lenders pay Loan Officers rebates for loans with rates higher than the current market rate.
Assume certain circumstances regarding credit, income and assets yields a market rate of 6.5% and the Loan Officer sells the loan with a rate of 7%, the Lender will pay the Loan Officer a rebate on that loan.
If the closing costs do not include the origination, the Loan Officer just needs to raise the interest rate high enough to get a rebate of at least a 1%. And if they want to make more than 1%, they only need to raise the rate a bit more.
This goes even a step further when Loan Officers market ‘no cost loans’. Again, refinancing costs money and the fees associated with a purchase or refinance get paid one way or another so if they’re not itemized in the closing costs, they’re hidden in a higher interest rate.
In today’s lending environment, you can mark up a loan so high that you get 2 or even 3% rebate after the loan closes. Don’t get fooled by ‘no cost loans’. It’s just a marketing gimmick.
There are four main categories of closing costs that will be explained:
First, you get the origination and any points you pay to buy the rate down.
The second is the lender fees including underwriting and processing.
Third, you get all the third-party fees like the credit report, appraisal, flood certification, notary and tax service.
The forth category includes the escrow and title fees such as recording, settlement, courier and title insurance.
For purchase transactions, there’s one more category for transfer taxes. In California, transfer taxes range from $1.10 per $1000 to almost $15 per $1000 in some municipalities.
The Secret Behind Points And Closing Costs: Stay Tuned For Part 4
We have covered a good amount of information in this article. However there are more secrets to be unleashed as we progress along in the series, “The Secret Behind Points And Closing Costs“. So be sure to look out for part 4 of this series. Till then, Take care and have a great day.
Take Care And Have A Great Day
Dr. Gregory Stargell II
Finally A Word From Our Sponsor
If you are looking for a way to achieve rate of returns that have surpassed the banks (savings, CDs, Money Market, etc) and more secure than stocks and bonds. Click the banner below and get information on how to join our awesome team.