 | Brad Kidd
is a graduate of Florida State University with a BS degree in Accounting and Finance. He has worked as a management consultant for Ernst and Young in Dallas, Texas, and moved to Wichita in 1999 to begin Midwest Financial Services, LLC. His expertise include personal and corporate finance, strategic planning, and debt re-structuring. Midwest Financial Services, LLC has Mortgage Brokerage operations in Oklahoma City, Little Rock and Wichita. |
Banking & Finance
2003-08-01 11:28:00
Closing costs or interest rate?
: Why do some lending institutions for mortgage financing concentrate on little money needed at the time of closing and others concentrate on the interest rate?
ANSWER: The simple answer is that both scenarios have appeal to different types of borrowers. Lending institutions use one, or sometimes both of these strategies to satisfy a particular borrowers' needs for their circumstances.The in-depth explanation requires an understanding of how lending institutions make their money. A lender or broker makes their money in two ways: the fees they charge up front and by the rate the customer is paying in interest. Again, depending on the borrowers' needs, one or both of these methods may be used.The majority of borrowers who are purchasing a home seem to be primarily concerned with having to come up with as little money as possible at closing. Therefore, lenders and brokers search out programs to meet this need. A program with little or no money down will normally carry a higher interest rate and an increase in the amount of mortgage insurance coverage required.The majority of borrowers refinancing their homes don't need cash to close because of the equity they have in their home. Therefore, they are searching out the deal that makes the most sense to meet a short term or a long term goal. If their motivation is to consolidate debt, they may use most or all of their equity, creating the need for little or no up front costs. If they have plenty of equity and don't need to consolidate debt, they may choose to pay up front fees in order to receive a lower interest rate. When the borrower's situation is such that they can put their fees up front and receive the lower rate, that is usually the scenario that will create the most savings over the life of the loan. To illustrate this point, observe the following example of a refinance of $125,000.
