Closing costs study reveals a shell game

Comparing mortgage closing costs is one of the most confusing, frustrating exercises a consumer will go through. A survey by Bankrate.com shows why.

The survey shows that the pricing of mortgage fees is a shell game, with different lenders calling the same fees different things. Some lenders charge a slew of separate little fees and others charge a few bigger fees.

Borrowers receive paperwork of varying completeness. Some lenders estimate the cost of title insurance and others don't. Some estimate state and local taxes and others don't. Estimates of state and local taxes vary wildly, although it seems that they should be easy to calculate accurately.

The lesson is that you not only have to shop around, but you must compare and probe to find out which lender is really offering the best deal. Mortgage fees vary widely, lenders make errors when calculating things such as taxes and the good faith estimate doesn't always include every cost.

"Right now, (consumers) have to make a lot of assumptions," says Stanley Rhodes, president of ABN AMRO Mortgage Group. "Frequently they're very confused and they can't make a valid comparison of the costs between one lender and the next."

ABN AMRO offers a loan program, OneFee, in which all the closing costs are guaranteed. But the vast majority of mortgage lenders and brokers give borrowers a federally mandated document called the good faith estimate, which often is inaccurate.

Organize before deciding
To make sense of mortgage offers, it helps to be incredibly organized. Mike Shust is. When the engineer from suburban Houston refinanced his home loan this summer, he collected good faith estimates of closing costs for various loan scenarios and plugged the numbers into Excel spreadsheets. He analyzed those spreadsheets as if thousands of dollars were in the balance -- which was the case.

"It took a lot of time," he says, "primarily because I wasn't comfortable with anyone else figuring it out for me. I don't think anything particularly was hard to understand. The hardest part was figuring out which costs were firm and which were mushy."

He ended up doing business with Kelly Malatesta, a loan officer from the Houston office of Chase Manhattan Mortgage who didn't give him "mushy" numbers. "For all intents and purposes," Shust says, "my good faith estimate matched my closing."

Shust aided himself by getting loan estimates from three sources. One was the mortgage broker he used when he bought the house. Shust quickly eliminated the mortgage broker from contention after analyzing the numbers from the purchase transaction in 1999. Shust discovered that the broker had slickly pocketed an extra $1,000 from Shust and $500 from the home's seller by manipulating the good faith estimate and final closing statement. "Basically, he got my earnest money," Shust says.

Determined not to be bamboozled again, Shust closely examined good faith estimates he got from Wells Fargo and Chase, which were comparable. Both loan officers seemed trustworthy and readily answered his questions, and he finally chose Chase because it offered an unmatchable rate on the day he locked.

Shust did a lot of things correctly. One was to seek referrals for trustworthy loan officers. Another was to ask a lot of questions and to insist on getting firm, accurate estimates of all the closing costs. He let everyone know that he wouldn't be pushed around. Shortly before the closing date, the title company told him that he might have to write a $2,800 check at closing instead of $2,400, so Shust got an estimate from a competing title company and let everyone know that he was willing to use the competitor. The tactic worked.

Shust's paperwork was rather straightforward, but not everyone is so fortunate.