searching for a loan

[Ira Boyd]

How much should one expect to pay in closing costs for a typical rental property loan right now. I am looking to borrow $225,000 with a conventional loan. I see these online sites with rates as low as 3.75% APR, but the closing costs are approximately $9,000. That seems excessive to me. Any thoughts????

[Joseph Zanazan]

The difference between your current payoff and your new loan amount is the costs that are associated with closing the loan (usually financed on your behalf). These costs are broken down into two categories. Prepaid finance charges and closing costs. Prepaid finance charges are the recurring charges associated with the loan i.e. property tax, homeowners insurance/HOA. Depending on whether or not you have requested to have your escrow account impounded, the new loan will usually set aside the premium for your property taxes and homeowners insurance for the following 12 months as a cushion for the lender. Your impound account acts as a deposit so in essence it always stays there once you have originally designated it in escrow. Closing costs on the other hand are comprised of two additional categories themselves. The cost to originate the loan, which is what the bank will charge you for processing and underwriting the file. And your third party charges (usually completely independent from the lender unless otherwise stated) which is your title and escrow charges. Regardless of what you are led to believe, the act of processing your loan isn't any different on a primary residence vs a rental. Be aware of those who mislead and intend to suggest that costs should be relatively different. You should expect to pay on a loan amount of that size, anywhere between 1%-2% in closing costs + prepaid finance charges if there are any. If the company that funds your loan charges you $1600 to take the file from start to finish, and the 3rd party charges are another $1600, plus taxes and insurances for the next year of approximately $3200, its clear to see how it can seem that it costs $6400 to do a loan. Thats not always necessarily the case.

The primary differences between the loan on an owner occupied residence vs. absentee owner is the risk the investor who is lending you the money is taking. For this risk there is a premium to pay. The financing terms are simply a lot more conservative and less aggressive when it comes to rental property. Fannie Mae guidelines suggest a larger portion of collateral either in the form of a down payment on a purchase or equity on a refinance. Max LTV for these type of loans is usually 85% and interest rates general tend to be .375 to .500 higher compared to financing on a primary residence. Aside from the higher interest rate you pay on the money you have borrowed, the financing process shouldn't be any different in cost or experience.