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A close-up look at closing costs
By Michael
D. Larson • Bankrate.com
 How
much is too much? With mortgage closing costs, it's hard to tell.
Lenders, brokers and third-party providers of closing
services charge all kinds of fees to mortgage hunters. And because
those fees vary widely from state to state, market to market and
even lender to lender, consumers can have a tough time figuring
out whether their lender is giving them a fair shake.
But a new Bankrate.com survey should help. During
the first half of 2001, the company's researchers gathered closing
cost information from 103 lenders and brokers in 10 states. The
survey
contains data on the average, highest and lowest charges found
for everything from document preparation to title insurance coast
to coast.
Arm yourself
with knowledge
Consumers can use the information to bolster their negotiating position.
After all, while lenders hate to admit it, getting a mortgage is
similar to buying a car. Borrowers who know what their mortgages
"should" cost before they visit their lenders' offices
have a better chance of getting the best deals.
"Education is key to not getting ripped off in
the real estate process," says Rick Harper, director of housing
at the Consumer Credit Counseling Service of San Francisco.
Comparing one mortgage to another isn't as easy as
just comparing rates. Borrowers need to shop all three major components
of a loan's price -- rates, points AND fees -- before selecting
lenders.
Why? Mortgage companies often do the same thing car
dealers do to make money off consumers. Just as a dealership can
charge a lower finance rate but jack up the price of the car, a
mortgage lender can charge a slightly lower-than-average interest
rate or fewer points, but make it up by tacking on so-called "junk"
fees. Forget about fees and you may end up subsidizing the loan
officer's shiny new Camaro rather than getting the best deal on
your loan.
"A bank has a cost of getting a loan done and
they're going to make that cost up somewhere," says Steven
Schnall, chief executive of New York-based New York Mortgage Company
LLC. "If you find that a bank is very ready to negotiate fees,
you may also find the bank is charging a slightly higher interest
rate."
A maze of mortgage costs and
fees
Comparing closing costs isn't as easy as it sounds. Some lenders
give fees a wide variety of names in an effort to confuse consumers.
One might advertise that it doesn't charge an "application"
fee up front, for example. But it makes that up by charging a "commitment"
fee or "doc prep" fee at closing.
Other companies try to look cheaper by charging an
all-inclusive "processing" fee. But they may charge $900,
whereas a lender that itemizes might only charge $200 as an "application"
fee, plus $300 as a "funding fee" and $250 as a "review
fee" -- $750 total.
When people call and ask specifically about closing
costs, unscrupulous lenders and brokers may even quote only their
fees. That conveniently leaves out the hundreds or thousands of
extra dollars in other costs the borrower will have to pay.
Consumers trying to make the best of the less-than-ideal,
mortgage-shopping world will find Bankrate.com's survey useful.
It contains information on three of the four major closing-cost
categories: lender/broker fees, third-party fees and government
fees.
Lender/broker fees include charges for document preparation,
underwriting and origination, while third-party fees include charges
for title searches, flood certifications, appraisals and the like.
Government fees include recording taxes and other charges assessed
by local and state agencies.
Borrowers will find information on the first two categories
the most useful. Lender/broker fee information is helpful because
"doc prep" fees and other similar costs are negotiable.
Borrowers who know what lenders are charging, on average, to process
loans can determine if they're being overcharged and, if so, demand
lower prices.
"Different companies have different names for
different fees, but really what they are all trying to cover is
the costs for processing, underwriting and making a loan,"
says Schnall. "If you add them all up, you can compare one
lender to another."
Third-party provider data, meanwhile, can help because
some lenders let borrowers choose their own title insurers, appraisers
and such. Consumers willing to invest the time and effort may find
they can save money by choosing their own closing-service providers.
Not all lenders will play ball, though, and those
who do usually have "approved provider" lists. A customer
would have to make sure an appraiser is on the list, for instance,
before paying $300 for the person's services.
"The title insurance, as a consumer, that's your
call," says Mark Ulmer, senior vice president of home loans
field operations for Seattle-based Washington Mutual Inc.
"Typically, what happens when you're going to
buy a house and you're going through a Realtor, they know what title
insurance companies do the best in the market and they want to control
that. But you as the buyer, you're paying that and it's between
you and the seller in some cases. You can go out and shop around
title companies."
With appraisals, "It's up to the lender as far
as determining the value that they should be using to make their
loan. You could go down the block and find Joe the Appraiser and
he'll do it for $100, but Joe doesn't know anything," he says.
"We have approved appraisers that we will accept
appraisals from. We're not doing appraisals for the buyer. We're
not doing it for the seller. We're doing it for us. We need to make
sure we're protected."
Government fees final
Information about charges that fall into the government category
and the fourth closing-cost group -- escrow/interest fees (otherwise
known as "prepaid items" or "prepaid amounts")
-- isn't as helpful.
State laws, the time of month the loan closes and
the due date of taxes and insurance, among other things, determine
those charges. That means lenders and private-market, third-party
providers have no say in the matter and can't be convinced to lower
those prices.
When trying to negotiate fees that can be changed,
however, some borrowers will likely find they have more pull. A
perfect-credit customer in the same job for many years who wants
to buy a cookie-cutter suburban home, for example, has a good shot
at getting lower processing and appraisal fees.
That's because the lender can do much of the application
processing electronically and the appraiser may just be able to
perform a "drive by" appraisal. A shopper with subprime
credit who is self-employed and looking to buy a dome house in the
Colorado mountains, however, requires much more hand-holding and
lender man-hours.
The hard truth
No matter what, consumers have to be realistic. Lenders, appraisers,
credit reporting agencies and other parties to a mortgage transaction
have to make a certain amount of money to cover their cost of doing
business and turn a profit. Some fees simply can't be avoided, and
customers who won't accept that may be told to take a hike.
"When a bank is making a loan, often times a
bank sells the loan to another institution. They may incur a fee,
maybe $100 or $200. They also incur wiring fees. If you go to a
mortgage banker for a loan and they use a line of credit, they're
going to incur fees," says Schnall. "As far as courier
fees, most lenders will charge one and it's because when you're
processing a loan, a lot of things have to be shipped from here
to there.
"All lenders have these fees," he adds.
"They're not necessarily profit centers for these lenders,
they're just ways for lenders to cover the cost of these processes.
You can only go so far and there's a point at which somebody's not
willing to do a loan."
Still, consumer experts say borrowers shouldn't be
afraid to ask for reasonable closing cost breaks. And no matter
what, don't accept a lender's "that's just the way it is"
answer when asking why your good
faith estimate shows $5,000 in assorted fees for a $100,000
mortgage.
"Question all the fees. Ask about it:
'Is it required? What is it?'" says Harper, the San Francisco
housing counselor. "We're talking big bucks, and it's easy
for someone to slip in $300 for this or $400 for that."
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