When you take out a mortgage, you’re responsible for a variety of fees known as closing costs, in addition to interest on the loan and any down payment you’re making.
Some of these closing costs may be “junk” fees, which — while not illegal — can come as an unexpected charge, or seem pricier than they should be. Here’s what to watch for.
Where to find ‘junk’ fees
Closing costs generally equal 2 percent to 5 percent of the amount you’re borrowing for your mortgage. These fees can be broken down into the following:
- Origination and other lender fees, which can include an application fee, an underwriting fee, a processing fee, an administrative fee and more
- Discount points, which are fees you pay to lower the interest rate on your loan
- Third-party fees, which include the cost of an appraisal, title insurance and other services necessary to close the loan
- Taxes and government fees
- Prepaid expenses and deposits, which may include an initial interest payment, homeowners insurance premium and property tax payment
While these fees are legitimate, they may be marked up or otherwise higher with one lender over another, making them unnecessary to pay, or “junk.” It’s important to evaluate fees carefully to avoid any excessive costs.
How to compare fees
You can find out what the closing costs for a mortgage offer will be on the loan estimate, which is a document provided by the lender that contains the details of the loan.
When you compare loan estimates, look for the lowest total “Loan Costs” between mortgage offers, the Consumer Financial Protection Bureau (CFPB) recommends. That’s because lenders sometimes break down fees in different ways, so it can be confusing to know if you’re comparing apples to apples.
For example, the “Loan Costs” may be listed as an application fee, origination fee, underwriting fee, processing fee, verification fee or a combination. You can save yourself the hassle of deciphering these fees individually and simply focus on the “Total Loan Costs,” which are summed up in part D on page two of your loan estimate. This can help you scrutinize whether an offer might contain inflated or marked-up fees.
Some of your loan costs may be included in sections called “Services You Can Shop For” or “Services You Cannot Shop For.” The latter covers required services that the lender orders, and you don’t have control over how much they cost. However, you can still compare the complete cost of these services to other offers to find the most competitive.
As for the services you can shop for, these are also required, but you’re allowed to shop around and choose the vendors you prefer at the prices you’re most comfortable paying. Making the effort to do so could save you money. Your lender might provide a list of approved providers for these services, but you can also find others through recommendations from friends or family or an online search.
If you’re unsure about the services you can and can’t shop for, “don’t be afraid to ask your loan officer questions — that’s why they are getting paid,” notes Marcus Johnson, CFP, vice president of investment management at Johnson Financial Advisors in Tempe, Arizona.
How to avoid junk fees
Making the extra effort to compare closing cost fees and shop around for affordable vendors could save you as much as $500 on title services alone, according to the CFPB. That’s because the lender-picked providers could be affiliate companies or partners, rather than a vendor with the cheapest rate or best service.
Don’t just go with the first mortgage offer that you qualify for. Ask at least three different lenders to provide you with a loan estimate.
“Make sure you request an initial disclosure, which will help you compare and understand origination fees, recording and title fees, etc.,” Johnson says.
Be aware, though, that what’s on the loan estimate isn’t final. The costs can change, and you might receive a revised loan estimate. Some costs can also creep up before the closing. Be sure to examine the closing disclosure for any fees that increased sharply without explanation. You’ll receive this document prior to closing, so you’ll have time to ask your loan officer to explain any changes.
In addition to shopping around when possible and comparing offers, you can try to negotiate some fees. If fees are coming from a lender you like but are higher than others, ask the lender if they’d be willing to negotiate in order to get the deal done. Showing them your other offers may help make your case, and net you the best deal.