Defining Closing Costs for Texas Home Buyers
Generally, when a lender refers to “closing costs” they are referencing the fees required as a result of a property transaction. Closing costs can be broken down into two basic categories: Lender Origination Fees and Third-Party Fees.
Lender Origination Fees
Lender Origination fees might include the following:
- Processing Fee
- Underwriting Fee
- Administration Fee
- Closing Fee or Attorney Fee
- Origination Fee (expressed as a percentage of the loan amount)
- Discount Points (expressed as a percentage of the loan amount)
An Origination Fee of 1% used to be more common before 2012 but, Texas lenders rarely use them now. Discount points are still an option for buyers who are interested in “buying down” their interest rates. The costs of Discount Points are reflected in a buyer’s closing costs and are often tax-deductible.
Fees for the property appraisal, credit report, and flood certificate are additional one-time transaction costs. These are fees that are not originated by the lender and must reflect the actual cost for the service rendered.
Because Lender Origination fees are either charged by the lender directly or are otherwise controlled by the lender, the total is one way for borrowers to compare different lenders against one another.
Third-Party fees are generally going to be charged by a title company or another outside party. They might include the following:
- Escrow Fee
- Closing Fee
- Courier Fee
- Recording Fee
- Notary Fee
- Settlement Fee
- Owner’s Title Insurance
- Lender’s Title Insurance
- Property Survey
- Final Inspection
- Pest Inspection
Not all of the above will be applicable in every transaction, but they will end up the same regardless of the lender.
Finally, the borrower should expect to pay Pre-paid Items and deposits into the escrow account. These can include:
- Prepaid interest
- Property taxes
- Hazard insurance
- HOA dues or transfer fees
- Similar to the Third-Party fees, these will also be the same regardless of lender.
Should You Pay Discount Points?
Discount points can be used to “buy down” an interest rate which can affect how much you’ll pay in closing costs.
At JVM, we don’t recommend discount points for a few reasons.
- Too Little Bang for the Buck. When using points, borrowers typically only get about a ¼ percent improvement in their rate for buying a point. It would take about four years for the borrower to recoup that point with interest savings. This can take even longer if you only focus on the savings from the resulting lower mortgage payment.
- Changing Rates, Changing Equity and Life Events. No matter how long people expect to keep their loans, we are always amazed by how soon they refinance. People refinance because:
- Rates fall sooner than expected.
- The equity in their home increases and they want to cash out and/or get rid of their Mortgage Insurance.
- Life happens. People get new jobs, families grow, and housing needs change.
- There is a Recession in the Future. Many economists and hedge fund managers predict a recession after 2020. When recessions hit the economy, the Federal Reserve lowers its rates. When rates fall, most borrowers who have obtained loans in recent years will likely be able to refinance at no cost.
- Unscrupulous Lenders. Many lenders try to convince borrowers to pay points for rates that they could have likely obtained at “no points” with a different lender. Unscrupulous lenders convince borrows that they are paying “discount points” to buy down the rate when really, the lenders are padding their overall commission.
- Cash Is King. It requires more cash to pay points. For many of our borrowers, cash is all too tight in the first place. It is simply better to remain more liquid for a variety of reasons – home improvements, investments, unexpected expenses, etc.
To read more about why we advise against points, check out this blog.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 335646