Closing Costs

Closing costs for refinance loans and the new economic stimulus

After the phase of understanding and opting for a refinance option is over, the next step includes the paperwork and the other processes which are not only lengthy but also necessitate a lot of fees. Though these closing costs are unavoidable, most of the times the homeowners, i.e. the debtors have the choice of either paying these fees up front, or just finance these fees into the mortgage. While the option to finance the fees into the mortgage gives the debtor more time to pay, it also increases the principal amount of the loan by that extra amount of dollars, and also the corresponding interest loss.

It should be noted that the term closing costs has been commonly used in refinancing of mortgages and these apply for a refinancing loan, which requires many steps to be fulfilled before the loan can be finalized at closing. Since most of these steps involve fees and unless these are negotiated, it is the responsibility of the homebuyer to pay for these extra costs and expenses. Like the different interest rates, even these closing costs vary from loan to loan and from lender to lender. In a market situation, where the sale of properties is very quick, the buyers should be prepared to pay 3 to 5 percent of the home price as these fees. Depending on whichever option is selected for the fees, before applying for a mortgage or a refinance, you should consider these following two types of closing costs.

a) Recurring

b) Non-recurring costs.

Most debtors who have used a mortgage broker or who plan on using one will get a structure of different fees which need to be paid as their closing costs. While most of these fees like application charges, discount and origination points, title search, credit reports and other related reports, attribute to a onetime cost which need to be paid at the time of the closing, and hence are non-recurring in nature. There are also a lot of time when the debtors are supposed to pay some of these above mentioned fees annually and hence making them recurring fees. The other recurring fees include various kinds of interest rates, property taxes, and a variety of insurances. Depending on the policies of the lender you have chosen and the mortgage plan which is selected, the home owners have the option to prepay some of the recurring costs with the option of having premiums included in the new mortgage payment.

The main reason why the debtors should consider these expenses is to ensure that they are aware of the estimated closing costs and there are no unpleasant surprises later on. Thus, it is very important that when you study the different quotes, you understand clearly there factors and calculations, and count the amount to be remitted to the lender as closing costs, before you finalize on one of the mortgage loans. A proper understanding will ensure that you are well prepared for these costs, have an approximate idea on the extent of these costs, and thus there are no shocks when these costs need to be remitted.

Why should you refinance now?

Since the third quarter of 2008, the United States economy has witnessed a very sharp phase of recession and due to this the consumer spending has gone down drastically. In earlier times, about 70 percent of the aggregate economic activates along with additional payments were made on personal mortgages. But since the recessions kicked in, there is a severe shortfall in the aggregate demand in most segments of the economy. According to reports, the current financial meltdown is the one of the worst of its kinds, second only to the Great Depression of the 1930s’. Owing to the subprime crisis and other issues, the home market segment has taken one of the hardest hits and yet there is a hope for economic recovery. After Obama was selected the President, there is an emphasis being made to increase the Government spending towards implementations which will lead to cut down tax rates. Along with required fiscal stimuli the US Federal Reserve has also put in some rate-adjustment reforms to improve the economic condition of the country. The acute credit and lending crunch due to lack of liquidity has also lead to the highest number of foreclosures in the country.

To fight this issue off and bring in a faster recovery, the Obama Government has come up with a plan for the housing sector, whereby, everybody is given an option to a 30-year fixed rate mortgage plan with an interest rate of just 4.5 percent. The current national average is around 5.47 percent and hence this stimulus provides almost a full percentage point off that national average. The advantage of this additional percent can be taken by most debtors who can now avail refinancing of the mortgages at 4.5 percent interest rate. Moreover, with the home markets cooling down, if the debtor has proper negotiations with the lender, he can also ensure that the seller pays the closing costs and hence the mortgage amount and hence the costs associated with it go down further. Unfortunately for now, this scheme is only limited to new home owners due to some reasons of economic turmoil.

The deeper idea of implementing this strategy is to pass on the benefits to the people that enable them to lower their expenditures for either buying a new property or refinancing an existing property. Since the refinancing will ensure that the debtors will get more saving after the refinancing, the additional liquidity or savings can be used by them to clear the other bills or outstanding debts that they have. This will ensure that over a period of time, the aggregate demands in the economy will go up again and there will also be stabilization in the real estate market.

The central idea of this policy is to provide a long term solution to the problems of recession and the sub-prime crisis and the total estimated cost of carrying out this stimulus is calculated to be about 3 trillion dollars. However, theoretically this plan has the potential to completely turn the economy around and ensure further economic recovery. Unfortunately, the implementation of this new plan is not too simple since both new mortgages and the refinancing of the old ones should be made available at 4.5% and this would increase the costs involved with this project’s implementation to sky rocket further. Hence, the US government has decided to limit this plan to only the new home owners as of now.

Updated: Jan 7, 2011 10:44