HOW CAN A LENDER OFFER LOW OR NO CLOSING COSTS?
Home buyers in the market to save money on closing costs often are pulled to the ads or marquees of lenders who offer Low Or No Closing Costs. We have several banks in our area that put out the signs and it draws people in who are looking for a deal on closing costs.
I've seen more than my share of folks who are swept into believing these lenders who offer low or no closing costs, often boasting "$250 closing costs", are really giving them a special deal. The old adage of if it is too good to be true then it is too good to be true fits here. So how can a lender offer low or no closing costs?
FACT: Most lenders can provide a home buyer with low or no closing costs.
Is this surprising? It should not be. If a savvy home buyer is comparing options they would soon realize the lender(s) offering low or no closing costs are simply doing so by using premium pricing. Premium pricing means a higher interest rate that creates a larger lender credit which the lender then uses to offset the closing costs. There are still closing costs, they are simply paid by the lender on the home buyer's behalf. Is it reasonable to think an appraiser or title company works for FREE on the loan?
I often speak with a home buyer who has limited funds available and we discuss ways to limit the out of pocket expense. One such way is to ask the seller to pick up the closing costs. Another is to premium price and have the lender cover them. One has to weigh the real facts. For instance if one pays the higher rate and has lower closing costs that higher rate will prevail as long as one owns the home being purchased. Is it worth it to pay the higher interest rate for say 30 years? Perhaps not.
On several occassions I have used premium pricing to assist a home buyer with closing costs. This is a decision made by the home buyer after being fully informed of the options.
So, before a home buyer chooses low or no closing costs discuss all the options with a lender willing to lay them all out so a smart choice can be made. There is no free lunch so question how a lender offers low or no closing costs and then compare other lenders.