Why do they charge so much for a home mortgage? If they are already getting the loan why do I pay closing cost

Question

The mortgage institution will be making hundreds of thousands of dollars over the life of the loan in interest therefore the closing cost should be "0" Ex. You can get a credit card (loan) and is free, they will make money on the interest

Answer 1

Most of the closing costs goto those people that provide services such as appraisals, legal work, title insurance, credit reports, etc to the bank on your behalf. The bank receives none of this.

IF you have decent to good credit you don't need a mortgage broker. The brokers get paid (well) for their services ( average of 1% of the loan) AND you pay the bank/lender fees. Again, you can always goto the bank your self and apply for a loan. You will cut your fees in about half by not using a mortgage broker.

The bank is still not making oodles of money on your loan. The industry statistic is that people keep their mortgage loans for about 5-7years: they either buy another bigger home or refinance for a variety of reasons: lower rates, cashout for home improvments, college etc etc. They receiver a small amount of that life of loan you are referring to. IN addition, most banks sell their loans, meaning they no longer own the loan so they get NO interest--only servicing rights of about 1%. Don't forget that banks have to "buy" their money too (as do mortgage lenders) either in the form of paying out interest on deposit accts (CD's, savings, etc) or loans from the Fed or FHLMC.

I hope this helps and Good Luck!

Answer 2

It doesn't work like that at all.

Let's say you take out a mortgage at 6.5%. You pay your bank 6.5%. They keep only .25%-.375% of that. The rest goes to Fannie Mae or another similar company. Fannie Mae will keep another .5% or so for their work in bundling the files to sell as mortgage-backed securities, guaranty fees, etc...

The people who buy the security (bond) will then earn the remaining interest, right now generally in the 5.5% range. That's not a terribly good return on their money, but it's pretty safe overall, depending on the quality of the loans in the portfolio.

So, on a $200,000 loan, your bank will earn from $500-750 per year servicing your loan. That's not a lot of money at all.

Meanwhile, to create a loan, you need a professional loan officer who actually knows what he/she is doing. These aren't that easy to come by. You need underwriters, processors, closers, accounting, etc... to close your loan.

Then you have title insurance, which varies by state but can be somewhat expensive.

Then the state and counties get their hands in the till for another few hundred bucks.

And why, exactly, should no one get paid for their time and effort in giving you your loan?

You always have the option of paying no closing costs. Almost any bank will let you do that. But you'll pay a much higher rate, usually .5%-.75% more. That way, the bank will get a higher premium from the sale of the loan to Fannie or Wall Street, and pay the salaries for their employees from that money instead of money paid upfront by you.

On a $200,000 loan, you'll pay another $1000-1500/year in interest doing it this way. Average closing costs on a loan that size are about $5000-6000. A no-cost loan makes sense for the first 2-3 years. After that, you'll pay more and more every year for thinking you're too good to pay for people to work for you.

And to compare it to a credit card is just silly. It costs very little to create a credit card account. There's no collateral, no qualifying, nothing. And, you generally pay rates from 15-25%. Do you really want that on your mortgage?

Answer 3

The closing costs are not monies received by the lender. Closing costs include the loan broker's commission and other expenses related to processing the loan. There are title fees, document processing costs, credit checks, FedEx fees, and a host of other expenses incurred by the folks who handle the paperwork and origination of the loan. These folks are separate from the actual lender.

Another hint to you. Lenders don't make 'hundreds of thousands of dollars' over the life of the loan. Do you have some silly notion that they get this money from investors for FREE ?

Answer 4

Because once you have the loan the only ones making money on your loan are the mortgage investor and the servicer. The Investor puts up say $300,000 and gets back $1500.00 per month @ 6% less servicing fees. So the wndow of opportunity is at the start of the loan for all others to make profit. Plus those investors need the others who close the loans to insure that they'll get their expected return thusly those others are allowed to make some money.

Answer 5

Closing costs include things like the fee to the attorney for making sure the house transfers to you legally, insurance on the house to make sure if it burns down around your ears, you have money to build another one, and taxes due to the city/county. I really don't know about the 'points' a bank charges...supposedly for certain interest rates etc. I don't see the point in that. Also included is the interest on the money you borrow - say you borrow it today and don't make your first payment til August 1. The bank will charge you interest til that day on the money they've already loaned you.

Answer 6

It have some factor