Options for Paying—or Not Paying—Your Closing Costs
October 30, 2014
Many borrowers have long viewed closing costs as a sort of necessary evil of getting a loan. For them, settlement day means writing a big check for all of the fees and charges associated with getting a mortgage.
However, that’s not strictly the case anymore. Today, most borrowers have three options in terms of paying their closing costs—with two of those options having no out-of-pocket expenses on settlement day. Each option does have its pros and cons, so be sure to talk to your lender ahead of time.
Option 1: Roll Closing Costs Into the Loan. Rolling all of your closing costs into a mortgage has become a very popular method of paying closing costs. By adding the closing costs to the loan balance, you can avoid paying cash at closing—and can use that cash for your new home or keep it as an emergency fund. However, to roll your closing costs into your loan, you’ll need to be able to qualify for the larger loan and the new loan amount can’t exceed your loan-to-value ratio (LTV), which is the amount of the loan as compared to the home’s value.
Option 2: Get a Zero-Closing Cost Loan. Sometimes called a “no-cost loan” or “premium pricing,” a zero-closing cost loan allows you to avoid paying any of the closing costs. With this option, the lender pays all of the fees and nothing is added to your loan balance (nor are there any “hidden” charges). In exchange, the lender will require you to accept a slightly higher interest rate, although the increase is often fairly small, such as a quarter of a point. A zero-closing cost loan is a particularly good option for those homeowners who don’t plan on staying in their new home for a long time.
Option 3: Pay With Cash at Settlement. Taking the traditional route of paying with cash at closing may seem like the least attractive option compared to rolling closing costs into the loan or getting a zero-closing cost loan, but it can actually be a smart move. If you decide to pay cash for your closing costs, you may be able to get a better interest rate and have more flexibility with the size of your loan. By reducing your interest rate, you’ll pay less in interest over the life of the loan.
Depending on several factors—such as the type and size of loan you’re getting and your financial situation—all of the options for paying closing costs may not be available to you. For the best information on your closing costs and the settlement process in general, talk to your mortgage professional well in advance of your settlement day.
For more than 25 years, Omega Financial has been serving mortgage clients in Massachusetts. Our brokers have approximately 50 years in the mortgage business. You always will receive fast, courteous, and accurate information. Omega Financial, Inc. is a company duly licensed to operate in Massachusetts as a Mortgage Brokerage. We are located in the Town of Norwood, Massachusetts where we have been operating as Omega Financial Incorporated since 1988. Licensed by the Commissioner of Banks - License No. MB2671