One of the most confusing parts of getting a mortgage is understanding closing costs.
Borrowers often receive a Loan Estimate or Closing Disclosure showing thousands of dollars in charges and assume that every dollar listed is a lender fee or mortgage cost.
That is usually not the case.
Some amounts shown at closing are true loan-related costs. Others are prepaid expenses, property taxes, homeowners insurance, escrow deposits, or other items that you would have to pay regardless of which lender you used.
At Capital Funding Mortgage, we believe borrowers should understand exactly what they are paying and why.
I’m John Madden, owner of Capital Funding Mortgage, and I have been helping borrowers with mortgage financing for more than 25 years. One of the things I spend the most time explaining to clients is the difference between actual closing costs and the total amount of money that may be required at settlement.
Mortgage closing costs are the fees and expenses associated with obtaining the mortgage and completing the real estate transaction.
They may include charges from:
However, not every amount shown under “Costs at Closing” should be viewed as a true mortgage expense.
That distinction is extremely important.
A useful way to understand a closing disclosure is to separate the charges into two categories.
These are costs directly associated with obtaining the mortgage or completing the transaction.
They may include items such as:
These are the expenses you should pay close attention to when comparing one mortgage offer with another.
These are amounts that are collected at closing but are not necessarily lender fees.
They may include:
These amounts can make the total cash required at closing look much higher, but they are fundamentally different from lender and settlement fees.
Suppose your Closing Disclosure shows:
The disclosure might show total costs of $13,000.
But that does not mean the lender charged you $13,000.
Only a portion of that amount represents actual mortgage-related closing costs.
The rest may consist of taxes, insurance, and prepaid expenses.
That is why simply looking at the total number can be misleading.
Lender fees are charges directly related to processing and underwriting the mortgage.
Depending upon the lender and loan program, these may include:
Some lenders bundle these charges together.
Others list them separately.
At Capital Funding Mortgage, we focus on the total economics of the loan rather than simply looking at how a fee is labeled.
A loan with a low advertised rate but large lender charges may be more expensive than a slightly higher-rate loan with little or no lender cost.
Discount points are fees paid to obtain a lower mortgage interest rate.
One point generally equals 1% of the loan amount.
For example, on a $500,000 mortgage:
1 point = $5,000
Paying points can make sense in some situations, but not in others.
The important question is:
How long will it take for the monthly savings from the lower rate to recover the upfront cost of the points?
If you pay $5,000 in points but save only $100 per month, it would take approximately 50 months to recover that cost.
If you sell or refinance before then, paying those points may not have been worthwhile.
A lender credit works in the opposite direction from discount points.
Instead of paying more upfront to obtain a lower rate, you may choose a slightly higher interest rate and receive a credit from the lender toward your closing costs.
For some borrowers, this can significantly reduce the amount of money needed at settlement.
This can be particularly useful when:
There is no universal answer as to whether paying points or taking a lender credit is better.
It depends upon the numbers and how long you expect to keep the mortgage.
Mortgage interest is generally paid in arrears.
At closing, the lender collects interest from the date you settle through the end of that month.
For example, if you close on the 20th of the month, you may pay approximately 10 or 11 days of prepaid interest.
If you close near the beginning of the month, the prepaid interest amount will be larger.
If you close near the end of the month, it will usually be smaller.
Prepaid interest is not an extra lender fee.
It is simply interest covering the period between settlement and the end of the month.
Many borrowers have an escrow account used to pay property taxes and homeowners insurance.
A portion of each monthly mortgage payment is deposited into the escrow account.
When taxes or insurance bills come due, the mortgage servicer pays them from that account.
At closing, the lender may collect several months of taxes and insurance to establish the escrow account with an appropriate balance.
This can make the upfront amount appear large.
However, escrow deposits are not the same as lender fees.
They are your funds being set aside to pay future property-related expenses.
Property taxes can create significant confusion because they may appear in several places on a closing disclosure.
Depending upon the transaction and the timing of the tax bill, you may see:
For a home purchase, the buyer and seller may also receive credits or adjustments based upon which party has already paid a particular tax bill.
These amounts can change substantially depending upon the closing date.
Most mortgage lenders require homeowners insurance to be in place before settlement.
Borrowers often pay the first year’s premium at or before closing.
The lender may also collect additional insurance reserves for the escrow account.
Again, these amounts can appear as part of the total cash needed to close, but they are not lender charges.
Title insurance protects against certain problems involving ownership of the property.
There are generally two types:
This protects the mortgage lender’s interest in the property.
This protects the homeowner’s ownership interest, subject to the terms and exclusions of the policy.
Title insurance costs can vary depending upon the purchase price, loan amount, location, and transaction.
For refinances, there may also be circumstances where prior title coverage affects the cost.
Recording fees are charged by local government offices to officially record documents such as the mortgage and deed.
These are third-party governmental charges.
The lender does not keep this money.
Depending upon the state and municipality, real estate transfer taxes may apply when a property changes ownership.
In a purchase transaction, these charges are often allocated between buyer and seller according to local custom or the sales contract.
Transfer taxes can be substantial, so they should be understood before settlement.
Purchases and refinances have some important differences.
A purchase may involve:
A refinance may involve:
With a refinance, borrowers sometimes believe they are “paying closing costs twice” because they see money being collected for a new escrow account.
However, the old mortgage servicer generally returns the remaining balance in the old escrow account after the existing loan is paid off.
That refund is separate from the new closing.
A zero-cost mortgage does not mean that all settlement activity disappears.
It typically means lender credits are used to offset some or all of the true loan-related closing costs.
You may still need to account for:
Those are not the same as lender fees.
This distinction is especially important when evaluating a zero-cost refinance.
Do not compare loans based on the interest rate alone.
Also do not compare them based only on the total cash-to-close figure.
A better comparison includes:
The lowest rate is not always the least expensive mortgage.
An advertised rate can look attractive until you discover that it requires substantial discount points.
For example:
Option A:
6.00% interest rate with $8,000 in points
Option B:
6.375% interest rate with no points
The first option has the lower rate.
But the second could still be the better financial choice depending upon the monthly payment difference and how long you expect to keep the loan.
This is why borrowers should always ask:
What does it cost to obtain that rate?
Cash to close is the total amount you need to bring to settlement after taking into account all of the transaction’s credits and charges.
It may include:
Cash to close is therefore different from closing costs.
That distinction is especially important for first-time home buyers.
In some purchase transactions, the seller may agree to contribute toward certain buyer closing costs.
The amount allowed depends upon the mortgage program, transaction structure, and other requirements.
Seller assistance can sometimes reduce the amount of cash a buyer needs to bring to settlement.
However, the sales contract should be structured carefully so the credit can actually be used.
Borrowers sometimes become concerned when amounts on the final Closing Disclosure differ from the original Loan Estimate.
Some charges are controlled by the lender.
Others are estimates that may change because of:
The important question is not simply whether a number changed.
It is why it changed.
Before settlement, you should understand:
If those questions are answered clearly, the closing disclosure becomes much easier to understand.
At Capital Funding Mortgage, we do not believe borrowers should arrive at closing surprised by the numbers.
We review the loan structure and explain the difference between:
The goal is to make sure you understand what you are actually paying for the mortgage itself.
If you are purchasing or refinancing a home, comparing closing costs correctly can save you thousands of dollars.
A lower advertised interest rate is not always the better deal.
A higher cash-to-close figure does not always mean the lender is charging more.
The details matter.
Contact John Madden at Capital Funding Mortgage to discuss your mortgage options and receive a clear explanation of the rates, costs, credits, and cash required at closing.
With more than 25 years of mortgage experience, our goal is to help you understand the numbers before you make a decision.
Capital Funding Mortgage
Clear mortgage advice. Transparent costs. Experienced guidance.When borrowers compare mortgage offers, they often focus almost entirely on the interest rate.
That can be a costly mistake.
Two lenders can quote the same mortgage rate while charging very different amounts in points, lender fees, and other costs. Conversely, one lender may quote a slightly higher rate with significantly lower costs or even provide a lender credit.
The only way to compare mortgage offers accurately is to look at the rate and costs together.
At Capital Funding Mortgage, we believe borrowers should understand exactly what they are paying before choosing a mortgage.
I’m John Madden, owner of Capital Funding Mortgage, and I have been helping borrowers with mortgage financing for more than 25 years. One of the most important things I do for clients is help them compare competing mortgage offers on an apples-to-apples basis.
Mortgage pricing contains several moving parts.
A lender may advertise:
But those claims do not always tell you the entire story.
For example, a lender may advertise an attractive rate that requires several thousand dollars in discount points.
Another lender may quote a slightly higher rate with no points.
Which loan is better?
That depends upon the cost difference, monthly payment difference, and how long you expect to keep the mortgage.
Before comparing costs, make sure the lenders are actually quoting the same mortgage.
Compare offers using the same:
Comparing a 30-day rate lock from one lender with a 60-day lock from another may not be a fair comparison.
Neither is comparing a quote with points against one without points.
The details matter.
This is one of the most important questions a borrower can ask.
Suppose two lenders give you the following quotes on the same mortgage:
Interest rate: 6.00%
Discount points: $7,500
Interest rate: 6.375%
Discount points: $0
Lender A has the lower rate.
But that does not automatically make it the better mortgage.
You first need to determine how much the lower rate saves each month and how long it will take to recover the additional $7,500.
If the monthly savings is $150:
$7,500 ÷ $150 = 50 months
It would take more than four years to recover the upfront cost.
If you sell, refinance, or pay off the mortgage before then, you may never fully recover the money spent on points.
Discount points are one of the easiest ways for a mortgage quote to appear more attractive than it really is.
One point generally equals 1% of the loan amount.
On a $600,000 mortgage:
1 point = $6,000
Therefore, a quote requiring 1.5 points would involve:
$9,000 in points
That does not necessarily mean paying points is a bad decision.
Sometimes it makes excellent financial sense.
But the borrower should know exactly how much is being paid to obtain the quoted rate.
Never compare rates without comparing points.
The next step is to compare the charges imposed directly by the lender.
Depending upon the lender, these may include:
Lenders may use different names for similar fees.
That is why it is usually more useful to look at the total lender-controlled costs rather than focusing on the name of each individual fee.
A lender advertising “no origination fee” may still charge other lender fees.
Always look at the total.
A lender credit can reduce your closing costs.
However, lender credits are generally connected to the interest rate you select.
You may have several pricing choices:
None is automatically right or wrong.
The best choice depends upon your circumstances.
For example, borrowers who expect to keep their mortgage for many years may be more willing to pay upfront for a lower rate.
Someone who expects to refinance within a shorter period may prefer to minimize upfront costs.
One of the most common problems when comparing mortgage advertisements is seeing a rate without immediately noticing the cost required to obtain it.
A website may prominently display:
5.875%
But somewhere else the borrower may discover that the rate requires:
The rate itself may be completely legitimate.
The problem arises when the borrower compares that rate with another lender's no-point rate as though the two offers are equivalent.
They are not.
Some closing costs are not controlled by the mortgage lender.
These may include:
When comparing lenders, these charges should be evaluated separately from lender fees.
For example, if two lenders are using the same title company, the title charges should generally be similar.
A lender should not automatically receive credit for appearing cheaper simply because one estimate uses a different preliminary figure for a third-party expense.
Prepaid expenses are another area where mortgage quotes can appear very different even though the actual loans are similar.
Prepaids can include:
These amounts are real expenses, but they are generally not lender fees.
For example, one lender may estimate six months of property-tax reserves while another initially estimates four months.
The first Loan Estimate may therefore show more cash required.
That does not necessarily mean the first lender is more expensive.
The final amount depends upon the actual tax, insurance, closing date, and escrow requirements.
Suppose:
Lender A estimates $5,000 in escrow deposits.
Lender B estimates $2,500.
At first glance, Lender B appears $2,500 cheaper.
But if both loans ultimately require the same escrow amount at closing, there was never a real $2,500 difference in the cost of the mortgage.
It was simply a difference in the original estimate.
This is why borrowers need to distinguish between:
actual lender costs
and
amounts being collected for taxes and insurance.
On a standard Loan Estimate, Section A — Origination Charges is one of the first places I would examine.
This section may contain:
This section can be extremely useful when comparing competing offers.
However, it should still be considered together with any lender credits shown elsewhere on the estimate.
If one lender charges $4,000 in lender fees but provides a $4,000 lender credit, the net result can be very different from simply looking at the fees alone.
For example:
Lender fees: $4,000
Lender credit: $4,000
Net lender cost: approximately $0
Lender fees: $1,500
Lender credit: $0
Although Lender B appears to charge fewer fees, Lender A may actually have the lower net lender cost.
You must look at both sides of the transaction.
Cash to close is important, but it is not a good way to compare lenders by itself.
Cash to close can include:
Two lenders can therefore show different cash-to-close numbers even when their actual loan costs are nearly identical.
The key is to determine why the numbers are different.
APR, or Annual Percentage Rate, attempts to reflect the cost of certain finance charges in addition to the mortgage interest rate.
It can be useful when comparing loans.
But APR should not be the only number you consider.
The calculation assumes certain things about the loan and does not necessarily tell you which mortgage will cost less over the actual period you expect to keep it.
A borrower who expects to refinance in three years may evaluate the loan very differently from someone who expects to keep the mortgage for 20 years.
Another area borrowers should understand is a temporary interest-rate buydown.
A temporary buydown may reduce the borrower's payment during the first one, two, or three years of the mortgage.
However, the underlying note rate may be higher.
When comparing a temporary buydown with another loan, do not compare only the first-year payment.
Ask:
A lower initial payment does not necessarily mean a less expensive mortgage.
A lender may describe a mortgage as having no closing costs.
Usually that means lender credits are being used to offset some or all of the true closing costs.
You may still need money for:
These amounts are not generally considered lender closing costs.
A true comparison should determine exactly which costs are being covered.
I prefer the term “easy-to-miss costs” rather than assuming a lender is intentionally hiding something.
Borrowers should look carefully for:
The best protection is understanding the complete loan structure before committing.
If you are putting less than 20% down, mortgage insurance may be another significant difference between loan offers.
The monthly mortgage insurance cost may vary based upon:
Do not compare principal and interest payments while ignoring mortgage insurance.
Your actual monthly housing payment is what matters.
Two identical-looking rates may not actually be identical if the rate-lock periods are different.
Ask each lender:
A longer rate lock may cost more than a shorter one.
That does not necessarily make it worse—it simply needs to be included in the comparison.
A verbal rate quote can be helpful for an initial conversation.
But before making a final decision, borrowers should understand the complete pricing.
Ask for the important details in writing, including:
Without those details, it is difficult to make a meaningful comparison.
If you gave me two Loan Estimates for the same mortgage, I would start by comparing:
Are the rates actually the same?
How much are you paying to obtain each rate?
What does each lender charge directly?
Is either lender offsetting costs with a credit?
Is there a difference in the monthly cost?
Are there legitimate differences, or are the lenders simply using different estimates?
Are these making one offer look artificially higher or lower?
What is the true payment difference?
If one loan costs more upfront, how long will it take to recover that additional expense?
This is often the most important factor of all.
Suppose you are comparing these two mortgages:
Interest rate: 6.00%
Points and lender costs: $8,000
Interest rate: 6.375%
Points and lender costs: $1,000
Option A costs $7,000 more upfront.
Assume it saves you $140 per month.
The approximate break-even period would be:
$7,000 ÷ $140 = 50 months
That is a little over four years.
If you keep the mortgage for 10 years, paying the additional cost may make sense.
If you refinance after two years, it probably does not.
That is the type of analysis borrowers should perform instead of simply choosing the lowest rate.
There is no single rate-and-cost combination that is right for everyone.
The best structure can depend upon:
That is why mortgage advice should involve more than simply quoting a rate.
As a mortgage broker, Capital Funding Mortgage works with multiple wholesale lenders.
That allows us to compare available pricing and mortgage programs rather than relying upon only one lender.
More importantly, we believe borrowers should understand the economics of their mortgage.
When reviewing a loan, we can help explain:
If you have received a mortgage quote or Loan Estimate from another lender, you do not have to guess whether it is a good deal.
We can help you compare the numbers.
The goal is not simply to show you a lower rate.
The goal is to determine which mortgage provides the better financial value based upon your circumstances.
Contact John Madden at Capital Funding Mortgage and let us review your mortgage options side by side.
With more than 25 years of mortgage experience, I believe borrowers deserve to know exactly what they are paying—and what they are receiving in return.
Capital Funding Mortgage
Compare the rate. Compare the costs. Understand the mortgage.
