- The Washington Times - Wednesday, February 23, 2005

Industry leaders, politicians and academicians have been juggling with the problem of borrower “sticker shock” at the settlement table. Too many home buyers and refinancers face unpleasant surprises because their closing costs were higher than anticipated.

The notion of a “guaranteed closing cost” package is being tossed around in various circles. We will have to see what, if anything, will come of it.

Folks who read this column regularly know that I have been promoting the ultimate guaranteed-closing-cost package for more than 10 years.

It’s called zero-cost refinancing.

The concept is simple: In exchange for a slightly higher interest rate, eligible borrowers are able to refinance their mortgage and pay no points and no closing costs. All closing costs, such as appraisal fees, title insurance and county recording fees, are paid by the mortgage broker and so are not added to the loan amount.

As I said, the borrower accepts a rate that is usually about a quarter of a percentage point higher.

If the rate offered on the zero-cost program is lower than the borrower’s current rate, it makes plenty of sense because the borrower doesn’t have to worry about recouping the refinance costs over time.

The savings is immediate. If rates drop again, the borrower simply takes out another zero-cost refinancing loan.

So while the politicians and industry leaders are wrangling over how consumers can be offered a package deal, astute homeowners have been taking advantage of interest rate dips by refinancing with zero closing costs for many years.

In response to consumer demand, innovative professionals are now teaming up to offer zero-closing-cost programs for purchases.

Typical closing costs associated with a purchase transaction are significantly higher than with a refinance.

Title insurance and recording fees are much higher, and some states impose a hefty transfer tax.

Mortgage brokers are unable to cover the costs on a purchase transaction, even if the borrower is prepared to take a higher interest rate.

But if real estate agents, mortgage brokers and settlement companies collectively provide some kind of discount, a borrower can buy a house without paying closing costs.

Here’s how it works:

• The borrower may have to accept a rate that’s one-eighth or one-quarter percentage point higher.

• By accepting a slightly higher rate, the mortgage broker is able to contribute a fixed amount toward the borrower’s closing costs — perhaps 1 percent.

• The real estate agent agrees to kick in part of his commission — perhaps 3/4 percent of the purchase price.

• The settlement company also offers a reduced fee.

Closing costs in Virginia, for example, run about $5,200 on a purchase of $325,000.

The program is geared toward first-time home buyers who are getting squeezed out of the market as a result of soaring home values.

Indeed, various lenders offer 100 percent financing plans. In fact, there are many “103 percent” programs available that allow the borrower to finance not only the full purchase price but also closing costs. However, these programs are expensive, both in rate and fees.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@pmcmortgage.com).

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