Significant variation in closing costs is a major part of the process when considering which lender a homebuyer should go with. Often, mortgage buyers only consider which company will prequalify them and maybe the interest rate being offered. While those are important considerations, you can further reduce your purchase cost by shopping for closing costs.
It’s not always a simple task because closing service charges vary from state to state, from market to market, and from lender to lender. These variations are further complicated because different service providers use different names for similar services and fees. The three major categories to consider are rates, points, AND fees. Fees are typically the most difficult to decipher. Additionally, lenders resemble car dealerships in the way that costs can be shifted around to confuse and hide them from buyers.
Begin by understanding which fees are most
negotiable and the ones that are least or nonnegotiable. Lender/broker fees
include charges for document preparation, underwriting, and origination, while
third-party fees include charges for title searches, title insurance, flood
certifications, appraisals, and the like. Government fees include recordings,
taxes, and other charges assessed by local and state agencies.
Lender and broker fees are the most negotiable because those are set in-house by your lender or broker. They have the ability to waive or reduce these fees. You may need to talk to a manager instead of a first line loan officer but these fees can be adjusted. You can also sometimes obtain discounts or lower costs for third-party providers. Ask your lender to contract services from a less costly provider or forgo any fees your lender is tacking onto the transactions. Government fees are the least negotiable.
There are many variations to how fees are paid from zero closing cost options, to discount points, to lock in rates, to rolling closing costs into your mortgage principle, as well as other options. Here, you should begin with an honest assessment of how long you anticipate owning the home. Few people ever pay off their mortgage. Especially a first loan when they plan to move up to a bigger home in the future or anticipate needing to relocate in a few years.
The general rule of thumb is if you plan to pay this particular mortgage for seven years or more, the lower the interest rate you want. In that case, you may want to pay upfront for a discounted interest rate. This is a percentage of your loan size where 1 discount point carries a cost equal to 1% of your loan size. A $200,000 loan with one discount point would require $2,000 in "points" to be paid at closing. This lowers your overall interest costs the longer you hold the loan but probably doesn’t make sense if you plan to refinance, relocate, or otherwise pay off the loan in a short period of time. Online mortgage calculators can help you determine what makes the most sense for your circumstances.
With a low-cost or zero-closing cost mortgage, closing costs are prepaid by the lender on behalf of the borrower. In exchange for paying the fees, the lender will raise the mortgage interest rate for the borrower's loan. Again, the length of time you will pay on the mortgage helps determine your lowest cost option.
Also known as “junk” fees, these fees are tacked on with or without merit. Some lenders claim these are necessary costs that must be paid by the borrower. However, many studies have shown these fees cannot be traced to definitive costs paid by the lender. Even when they can be traced, these fess are often found to be greatly inflated. A lender might want to charge you a $150 courier fee to deliver documents when the actual cost is less than $25. And could have been avoided altogether by using postal mail if the lender prepared the documents in a timely manner. Other fees to question are “administrative fee", "application fee", “appraisal review fee", "document preparation fee", "document review fee" and any other fees you don’t clearly understand or agree with. Many of these are the cost of doing businesses and are recovered through the interest you pay for the loan. Keep in mind that mortgages are about the only loans charging these fees.
The best time to challenge these fees and even out right refuse to pay them is when you are presented with the Loan Estimate (when you formally apply for the loan). Negotiable service fees are summarized in Section C. The actual amount you are being charged will be on the Closing Disclosure (again in Section C). Be sure to study the Loan Estimate closely before committing to a loan. Also closely examine the Closing Disclosure to be sure you are being charged what you actually agreed to.
Please comment with your thoughts and experiences negotiating loan fees. Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].