Lender Paid Closing Costs

As discussed previously, some lenders are willing to make arrangements to pay the borrower's closing costs by increasing the interest rate. Moreover, with an FHA loan, you can actually finance a portion of your closing costs.

As with seller subsidies, most lender contributions toward closing costs are limited to only 3% of the loan amount.

The lender simply increases the interest rate to a level where they will be receiving sufficient income to cover your closing costs and interest. This increase will probably range anywhere from one-half to one full percent, depending on the loan size.

As scary as this interest rate hike may seem, it's actually a smart move:

  • Interest is tax-deductible. The impact of the higher interest rate is lessened because of your ability to deduct them from your taxes.
  • Refinance option erases the closing costs. Remember, there's few if any restrictions to your subsequently refinancing to a lower rate. In a sense, you can make the closing costs disappear.

For example, Jesse has enough money for the down payment and reserves but none for the closing costs. The sellers are unwilling to renegotiate, so Jesse arranges for a lender subsidy. His interest rate increases from 7.25% to 8.00%. However, a few months after the closing, he contacts the lender to refinance.

Since the lender still has his file (including appraisal and title), they are able to lower his rate with no lender costs and total closing costs of $50 (to record the new mortgage). The new rate is back to 7.25%, or lower if the market has improved.

The beauty of this approach is that the closing costs are financed short-term, and then they are essentially refinanced away.

We hope that you've found our Mortgage and Real Estate Resource helpful and informative. We welcome all comments, critiques and suggestions; please send emails to [email protected]. Remember that whether your are buying a home or an office building, you are investing in real estate. As with all investments, the best investors are those who can gather the most knowledge, tools and resources. Regardless of whether you use our lending services, please spread the word about our resource center to anyone you know who may benefit from our site.

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