Closing Costs and Interest Rates
March 3, 2024
Whether you buy a home using an FHA mortgage or any other loan type, you must contend with closing costs, the down payment, and negotiate an interest rate with your lender.
For newcomers, those two issues sound completely separate.
But the reality is that closing costs and your interest rate can be more closely associated than you might think. One reason for that has to do with borrower choices. What do we mean by that?
FHA Home Loan Closing Costs
Your FHA loan cash-to-close requirements include the lender’s fee, your down payment, and other expenses such as the upfront mortgage insurance premium.
Some costs you can finance, such as the mortgage insurance premium. Others cannot be included in the loan amount, but your lender may offer you a “no closing cost” mortgage.
What Is a No Closing Cost Mortgage?
A no-closing-cost mortgage is one where the lender offers to cover the borrower’s closing cost in exchange for a higher interest rate. That higher rate makes up for the lender’s expense and keeps the borrower from needing to pay out of pocket at closing time.
That means the trade-off is an overall more expensive mortgage but a higher expense realized over time instead of in one lump sum.
Closing Costs and Your Down Payment
Some borrowers assume “cash to close” means the down payment would be included in the lender’s no-closing costs offer.
What’s the reality? FHA loan rules require the borrower to make a minimum down payment separate from closing costs.
Your money down is NOT included and must be paid upfront. While down payment funds can be supplemented with down payment assistance from approved sources, your lender cannot help you with the down payment.
Higher Rates
When the lender offers to raise your interest rate in exchange for no costs paid at closing time, you will pay more over the lifetime of the mortgage.
If you plan to keep the home for a long time, it may be smart to buy down the higher rate by paying discount points. Ask the lender about this option when discussing FHA mortgages and how to deal with the expenses of getting the loan.
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RELATED VIDEOS:
Annual Income Requirements for FHA Loans
Good Credit History Helps Get FHA Loans
Stay Informed About Your Mortgage Closing Costs
For newcomers, those two issues sound completely separate.
But the reality is that closing costs and your interest rate can be more closely associated than you might think. One reason for that has to do with borrower choices. What do we mean by that?
FHA Home Loan Closing Costs
Your FHA loan cash-to-close requirements include the lender’s fee, your down payment, and other expenses such as the upfront mortgage insurance premium.
Some costs you can finance, such as the mortgage insurance premium. Others cannot be included in the loan amount, but your lender may offer you a “no closing cost” mortgage.
What Is a No Closing Cost Mortgage?
A no-closing-cost mortgage is one where the lender offers to cover the borrower’s closing cost in exchange for a higher interest rate. That higher rate makes up for the lender’s expense and keeps the borrower from needing to pay out of pocket at closing time.
That means the trade-off is an overall more expensive mortgage but a higher expense realized over time instead of in one lump sum.
Closing Costs and Your Down Payment
Some borrowers assume “cash to close” means the down payment would be included in the lender’s no-closing costs offer.
What’s the reality? FHA loan rules require the borrower to make a minimum down payment separate from closing costs.
Your money down is NOT included and must be paid upfront. While down payment funds can be supplemented with down payment assistance from approved sources, your lender cannot help you with the down payment.
Higher Rates
When the lender offers to raise your interest rate in exchange for no costs paid at closing time, you will pay more over the lifetime of the mortgage.
If you plan to keep the home for a long time, it may be smart to buy down the higher rate by paying discount points. Ask the lender about this option when discussing FHA mortgages and how to deal with the expenses of getting the loan.
------------------------------
RELATED VIDEOS:
Annual Income Requirements for FHA Loans
Good Credit History Helps Get FHA Loans
Stay Informed About Your Mortgage Closing Costs
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