What are closing costs?
“Closing costs” in a loan refer to the ONE-TIME expenses associated with the work that is needed to close the loan. These “costs” can include origination fees and discount points; appraisal and credit report fees, title insurance, loan closing fees, and endorsements for title, tax certificates and release/recording fees. If you are getting a “no-closing cost loan” that means that these fees are being credited to you by Hallmark Home Mortgage. The rate you get will be slightly higher than if you were to be charged closing costs.
What are pre-paids?
Your recurring expenses, or “pre-paid” expenses are those items that are associated with the ongoing maintenance of your mortgage loan. These are not considered costs. For example, interest is an ongoing, daily expense. The payoff amount on your old loan is affected by how many days have elapsed since your last payment. Your homeowners insurance is an annual expense, and your taxes are paid in Colorado two times per year, in February, and June.
A new escrow account?
When you refinance your loan, a new escrow account must be established, and enough funds deposited in that escrow account to insure the availability of funds to pay your next tax and insurance bill, when they come due. The funds in your escrow account at your old lender are returned to you usually within 30 days of your loan being paid off, and this is typically an amount less than the amount that is deposited with the new lender. These are not considered closing costs.
Who pays the pre-paids?
Recurring costs are always the responsibility of the borrower. Think about it like this — if you do not refinance, you will still have these ongoing expenses. These items, as well as your closing costs, can be added to your existing loan balance, as long as you stay within the loan-to-value limits of your loan program. Many clients choose to bring some or all of these funds to their closing, depending on the goals and objectives for the refinance.
Don’t be fooled by what some lenders call “No Cost Loans”
If you are adding the closing costs on your loan to your existing loan balance, don’t confuse this type of transaction with a “no closing cost” refinance. Some lenders are a little fuzzy in their definition of a “no cost loan”. Make sure you understand the difference, and that you know what type of refinance you are doing. “No Cost” does not mean that nothing is due at closing, there can be costs, but if they are rolled into the loan balance, some lenders call this a “No Cost” loan.