Closing costs are a part of almost any loan. Of course, you want to find the lowest fees possible. Sometimes you don’t have a choice, though. You have to pay the fees to get the loan closed. The big question surrounds subprime mortgages. Do you pay higher fees for this type of loan? Of course, there are a few ways to answer this question.
Higher Fees May be the Case
If you took a random poll, you would probably find that closing costs are higher on subprime loans. It makes sense, though. Subprime loans are for borrowers with less than perfect credit. They may also have other issues, such as unstable income or income that can’t be verified. There is a reason the borrower could not get conventional lending. This makes them riskier.
As a way to get the money the lender needs right away, they charge higher closing costs. This helps them offset the risk of default. If a subprime borrower does default, at least the lender made some money at the closing. Generally, lenders make money off the interest over the life of your loan. If you stop making payments, though, the interest payments don’t exist.
Different Lenders Have Different Options
Just because you may find higher fees on subprime loans doesn’t mean you have to accept outrageous fees. Every lender charges different fees. This is the case for any type of loan. Because of this, you must shop around. This way you can find the lender offering you the best deal. Subprime loans are often loans that lenders keep on their books. This way they can write their own rules. They can accept whatever risk they see fit to accept.
Because every lender’s program differs, their fees differ too. You might find one lender that charges 2 points up front just to fund you the loan. Another lender may not charge any points, but charges a slightly higher interest rate. It is up to you to decide which way you would prefer to pay for the loan. If you have the capital to pay it upfront, you get it over with. You also get lower payments. If you don’t have the cash right now, you may prefer the higher interest rate. Again, shopping around helps you find the best deal available for your situation.
A No Closing Cost Loan May be Possible
There is the option to secure a no closing cost loan, even on subprime mortgages. The tradeoff, in this case, is a higher interest rate. The lender needs to make money somehow. They usually charge ½ point higher if you opt for no closing fees. This means the lender eats the fees. They don’t make any money upfront on your loan. Instead, they make it on the interest you pay on the loan.
Not every lender will offer this option. It depends on the riskiness of your loan. If you have a blemished credit history, chances are you can’t take this option. Lenders need proof that you will make your payments on time. A timely payment history can help that. Even if you have good credit and don’t pose a risk for default, some lenders just don’t offer this option. Again, shopping around will let you know the options most available to you.
Many Loans Have High Closing Costs
Don’t assume because you have a subprime loan that you must pay high closing costs, though. In fact, today, you won’t find many loans called subprime. You’ll likely find them called alternative documentation loans. This means the lender accepts different methods of income verification. They can’t take ‘stated income’ loans. But, they can verify your income with your bank statements instead of your paystubs or tax returns, for example. This alternative documentation lets the lender verify your income and give you a loan.
That being said, even conventional loans can have high closing costs. It depends on many factors including the lender and your risk level. Some lenders just charge more for one reason or another. You wouldn’t know if you could find a better deal unless you shopped around. Conventional, FHA, VA, and USDA loans are supposed to have decent closing costs. That is a relative term, though. If you asked three different lenders, chances are you would get three different quotes.
Subprime Isn’t a Punishment
Don’t look at a subprime loan as a punishment. Look at it as a way to secure the funding you need. You shouldn’t have to overpay for this loan, though. If a lender makes you think they are doing you a favor by funding the loan, look elsewhere. Lenders should quote you fees that are within reason. The fees should match the cost of a service. The exception is origination points or discount points. These are fees that fund the lender in exchange for either a risky loan or a lower interest rate. These fees are warranted. You will likely find them on any loan type.
Don’t fall for the assumption that you have to pay higher closing costs for a subprime loan. Do your research and shop around. This is especially important if you have unique circumstances. You don’t want to accept the first offer you are given. You don’t know if it is within line with the other options available out there.
The best rule of thumb to use is to shop with at least three lenders. This way you can decide which one offers the deal that is right for you. Sometimes borrowers find that they want to pay higher closing fees so they don’t have a high interest rate. If they are going to be in the home for the long run, this may make sense. Borrowers who have a debt ratio close to the maximum, though, may think much the same way. They want the lower interest rate to keep their debt ratio down.
Only you know what works for you. Consider all of your options before deciding. This way you can decide which options is right for you.