Why Are Closing Costs so High?

This is an extremely frequently-asked question. Unfortunately, there’s not really a clear, specific answer. If you’re looking for an explanation of the various charges that are included in closing costs and how expensive each one usually is, then I would highly recommend the article for the FAQ “What are the Closing costs?”. In that article, we talk about the largest things that are included in closing costs and what they’re for. That will likely address that question as much as you need. If, however, you’re wanting to know why each of those items are so darn expensive (e.g. the funding fee, discount points, etc.), we’ll do our best to cover that here.

The funding fee may seem expensive, but it’s actually not too bad when you understand that it serves the same purpose as mortgage insurance on FHA loans and costs you a fraction of the amount of money. Mortgage insurance on FHA loans can easily cost you upwards of $10k every 5 years, while the funding fee is only going to be 2.15% of the loan amount as a one-time payment (Usually in the realm of $3k-$6k). The VA charges as little as they can for the funding fee and still minimize the burden of the VA loan program on taxpayers. While a significant chunk, however, the funding fee is far from the only thing that goes into closing costs.

Many people wonder why discount points on interest rates are so expensive. This is largely a matter of perspective, because usually it’s a pretty fair trade. Considering that generally the break-even point of paying discount points (the point where you’ve saved as much money on interest as you spent on the discount points) is around 5 years. The lender is accepting 25 years’ worth of less money in exchange for a relatively small amount of money now. Any way you slice it, at 1% of the total loan amount, the cost of a discount point is quite small in relation to the loan. The lender charges such a small amount for discount points because they would rather be guaranteed the money right now than take a risk on receiving that money later.

A lot of closing cost expense comes from the involvement of title companies (they costed my wife and I $2k when we bought our house last year, and I didn’t feel that they actually offered me any real value). You can thank the government for that, since the government requires that a licensed third party (the title company) mediate the loan closing between the lender and the borrower. Regardless of whether one believes the government requiring the use of a title company is a good or bad thing, it is one of the things that adds a pretty penny to closing costs.

If your question has more to do with Low VA Rates specifically, we can assure you that we strive to offer very low cost and rates.  If you’re wondering how you can keep your closing costs down as much as possible, let us know at the beginning of the loan application process, and we’ll write up a loan that emphasizes lower closing costs. In many ways, the VA loan program exists because getting a home loan is so expensive, and as such we have a lot of flexibility to make sure that you get the terms that meet your own needs as effectively as possible.

Like most things that seem unreasonable at first, closing costs are the way that they are for a reason. Sure, lenders, Fannie Mae and Freddie Mac, and even the investors and companies that purchase the loans, could probably survive with less profit from each individual loan, but it would take someone with more detailed understanding of the process than I have. For you, right now, it’s best to focus on what you can do to make your own costs as low as you need them to be.