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Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

How to negotiate your closing costs

Dear Dollar Diva,
I am refinancing and have heard that I can refuse to pay certain fees, such as processing fees and document-preparation fees. Is this true? On what basis can I refuse?

Dear Bonni,
You can refuse to pay various closing fees, and the bank can refuse to give you a loan, but that's not how deals are made. Think "negotiate," not "refuse."

Closing costs
There are three categories of fees you will encounter when you close on a mortgage:

  • Fees charged by the broker or lender for services they provide, such as application fees, document preparation and loan-processing fees: These fees are for paper shuffling that's done in-house; the lender doesn't have out-of-pocket costs to third parties, so you want to push hard for waivers on them.
  • Fees the lender has to pay to third parties for services, such as appraisals and credit reports: You don't mind reimbursing the lender for out-of-pocket costs, but you don't want to get fleeced. There's less wiggle room here, but do your best.
  • Fees paid to the government for things such as taxes and recording fees: These are out-of-pocket costs the lender has to get reimbursed for one way or another, but you don't want to pay more than the fair amount.
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Each fee the lender assesses needs to be scrutinized; ask what it's for and if it can be waived or negotiated down. Closing costs can hover around 5 percent of the loan amount, so we're not haggling over nickels and dimes here; we're talking hundreds of dollars or more.

Here's a sample of fees extracted from Bankrate.com's 2001 nationwide study on closing costs:

Sample of closing costs*
Based on $125,000 loan

Diva's comments
Commitment fee

That's a lot of money for writing a letter to the home buyer. This is a "junk" fee; ask the lender to waive it.

Document-preparation fee
It's the lender's job to prepare documents; ask for a waiver.
Processing fee
This is a fuzzy fee that can act as an umbrella for a bunch of small, unidentified costs. Ask for a breakdown; if it's to cover the lender's overhead costs, ask for a waiver.
Credit report
A credit report costs up to $9; anything more requires an explanation.

The closing cost survey is must reading for anyone negotiating a mortgage. It will help you familiarize yourself with the types and amounts of fees that lenders are charging so you have a basis of comparison.

Creditworthiness counts when it comes to getting fees waived; folks with a FICO score of 780, who've been at the same job for five years, and are making a 20-percent down payment will fare a heck of a lot better than those with a score of 620, a history of job hopping and a pocketful of pennies for a down payment.

If your credit is in the sewer, and you're groveling for refinancing, you can't expect much success in chipping away at the fees. But try anyway; all they can do is say no.

For more on FICO scores, read the Bankrate's special report, "FICO, friend or foe?"

Shop around
Lenders know what they want to make on a mortgage, and will juggle the fees, points and interest rate to get there. Your job is to know what you want to pay, and understand the impact that the fees and points have on the rate.

To find out what kind of deals are out there, you've got to shop around. Talk to at least half a dozen lenders, go over their fees line by line, and by the time you've talked to the last one, you'll have the knowledge you need to cut a good deal for yourself.

-- Posted: Feb. 4, 2001

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See Also
A close up look at mortgage costs
Mortgage points and fees: what's deductible and when
4 secrets to successful mortgage negotiations
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