CNC Mortgage Blog

April 20, 2009

Mr. Chris Farrell

Minnesota Public Radio

480 Cedar Street

St. Paul, MN 55101

Dear Chris,

I read your article in the Sunday April 19, 2009 Minneapolis Star Tribune.

You made some very good points and I would like to expand on several of them.

You mentioned that closing costs could vary between 3% and 6%. Since a portion of the closing costs are fixed, no matter what the amount of the loan, the smaller loans have a higher %. I am attaching two good faith estimates for $100,000 and $417,000 where you can observe the differences. As a small mortgage broker our source of income is the loan origination fee and the yield spread premium, the rest of the costs to the borrower are paid to other providers.

The fixed costs on any loan are $2,129. The variable costs are made up the loan origination fee, title insurance and the mortgage registration tax. All the other costs are fixed.

On a $100,000 loan the fixed costs are $2,129 ( 2.13%), variable costs are $1,379 ( 1.38%) for total closing costs of $3,508 (3.51%.)

On a $417,000 loan there are the same fixed costs but now they are 0.51% of the loan amount, the variable costs are $5,645.65 or 1.35% of the loan amount for total closing costs of $7,774.85 or 1.86% of the loan amount.

One additional factor is the size of the loan, the smaller loan for $100,000 that I put in the example is affected by the loan size so the best rate today is 4.75% while the loan for $417,000 could get a rate of 4.625%.

One fixed cost that is not totally predictable is the underwriting fee charged by the lender. This can vary between $599 and $900 depending on the lender; frequently the lenders with lower underwriting costs have higher interest rates.

When a customer calls and is considering refinance my first question is how long they plan to stay in the house. I work up the closing costs for the new loan, adding their present balance and obtain a monthly payment. I divide the closing costs by the difference in payments to determine the time needed to get a return on their investment. If the time needed to recover their investment is less than the time they plan to stay in the house they should consider refinancing. When they consider going from a 30 year to a 15 or 20 year mortgage, the difference in monthly payments is not a good measure; I then calculate the difference in yearly interest paid.

Once we pass these explanations the customer must make other decisions:

To escrow or pay taxes and insurance directly, most lenders charge a one-time fee of 0.25% if the customer does not want to escrow.

Another large cost can be a cash-out fee that lenders charge when a borrower wants to take out equity on his property over 70% of the appraised value. This fee can be as high as 0.75% if the cash out loan reaches 80% of the value of the home.

You did not include mortgage brokers in your recommendations for shopping around for a mortgage. I am biased but I believe mortgage brokers can usually provide a lower rate, lower closing costs, and much better service.

Thank you for your consideration and I look forward to participating with you in another forum at MPR.

Best regards,