THIS is the second most common question we are asked. And again, the answer is — it’s complicated. It depends on these primary factors:
- type of loan – HECM or Jumbo
- Interest rate -Adjustable or Fixed
- Resulting interest rate and/or Margin (for adjustable rate loans)
- Cash drawn at close and similar elements.
Adjustable and fixed rate loans fall under different regulations. Generally, closed end fixed rate loans must be sold exactly as the lender offers in the marketplace. A broker’s loan originator cannot offer additional discounts. However for adjustable rate loans, more flexibility is possible.
So lets start with the basics — For the HECM loan, there are three elements of total cost:
- The government-mandated upfront Mortgage Insurance Premium (which benefits both the borrower and the lender). This is based upon a factor multiplied by the lesser of the appraised value or national lending limit. This fee goes directly to the government for partial insurance on the loan. Additional insurance is collected throughout the life of the loan.
- The origination fee, again a calculation, but capped by statute at $6000.
- “Other costs” which include those fees specifically tied to the close of the loan such as the appraisal, title, escrow, notary, recording fees, etc. The borrower only pays actual costs. But the fees most be adequately estimated to ensure reasonable estimate to the borrower – that is, they cannot be understated for the purpose of winning the transaction and then increased later.
For the JUMBO loan, the three elements of cost are reduced to two. Since the jumbo mortgage is proprietary to each lender, it is NOT insured by the US Government and is therefore insurance is not part of the closing costs. However, the origination fee does not have a limit by statute. So each lender adopts fee which they believe is competitive in the marketplace.