Comparing Mortgage Closing Costs

Closing costs are typically estimated for you in advance of a mortgage transaction. After you apply with a lender or broker, they are supposed to give you a “Good Faith Estimate” within three days.

This Good Faith Estimate (GFE) is a standard form you can use to compare closing cost estimate from some providers.

They are not written in stone. Some of the lender or broker’s charges are negotiable.

Try HUD's Comparison Worksheet.

Beware of Closing Cost Estimates

There are a couple of things to consider about these estimates in general, before we review what they contain. One lender might lowball the estimate by leaving out lots of charges such as unavoidable third party charges. In this way, one lender may estimate closing costs of $5,000 and another just $2,000. In the end when you go to sign your paperwork the $2,000 estimate may ending up being $6,000 in reality.

Another thing that may happen is that the charges that a lender can control – such as their own fees – change when you actually go to sign your documents. This can happen for several reasons:

• a dishonest initial estimate. This happens
• they are charging you more upfront to give you the lower mortgage rate you wanted
• your loan size changed from the time your initial application
• you may have changed your mind about what loan program you wanted so a different lender may charge more, etc.
• you may not be able to document the income or assets your application claimed
• you lost your job so the broker has to use a “no questions asked” type of lender
• your credit has fallen substantially since your initial application
• you were late on your mortgage after you applied and the lender found out

A summary of different charges follows.

Third party fees

There are many of these, some of which are unavoidable:

• These are “neutral party” charges that you will incur anyways in a mortgage transaction, such as the fees for a public filing

• Escrow charges – this is the service that a neutral third party (the escrow company) charges for being in the middle of everyone and handling the money in a fair and unbiased manner, in compliance with lender instructions and contracts

• Title insurance – this is the insurance policy that you pay, with the new mortgage lender as the beneficiary. This is a policy that protects the lender from future title issues on your property. Just in case it turns out that the person who sold the house to you was an imposter, didn’t really have title, etc. In case lawsuits are filed by new parties after a transaction claiming to own all or part of the property, this title insurance policy protects the lender. Title insurance costs increase with the value of the property.

• Hazard insurance – this is the hazard insurance policy on the property. The lender wants to make sure the policy is in place and paid up for a reasonable amount of time into the future – sometimes up to a year

• Document preparation fees, filing fees – these are usually relatively small

• Notary public fee – for notarizing the loan documents

Although there may be some room to maneuver on these costs, they are incurred regardless of who you do your loan with. You may want to use your own insurance agent for the hazard insurance policy.

Loan fees

These are fees that have to do with your loan:

• Your broker’s fees can include a percentage of the loan (each 1% of the loan amount is known as a “point”)
• credit report fee
• a broker processing fee
• broker administration fee
• lender fees – including underwriting fee, document drawing fee, etc.
• buy down – this is money you pay up front out of the loan to the lender to get a lower interest rate

Prepaid charges

A lender may also require that you prepay some of your future expenses. These are expenses you will incur anyways.

These can include:

• several months of property taxes
• a couple of weeks of mortgage interest

Negotiating Your Fees Down

There are some items you will have luck on, and some you won’t.

There are two things to prepare for:

• your proposed fees
• your actual fees

Your loan fees are usually the main expense. This is where you can comparison shop. Have your lender or broker clearly explain what their own fees are, so you know what you can negotiate with them about.

 Signing on the dotted line

 A critical tactic to saving money is having the ability to walk away from a loan. You can use this to avoid a last minute surprise. Sometimes the loan process is dragged on for so long the borrower just wants the process over, or they need the money.

 Review your “final” closing costs when the loan documents arrive. If there are big surprises, you won’t have to sign. You do not need to restart the entire loan process to get a new loan. You can let the broker or lender know what you want changed in order to keep your business. They should be able to regenerate the loan documents within a couple of days if they agree. Otherwise you will have to restart the whole loan process with someone else.

 There are other factors to consider with this tactic. You may have outside commitments to purchase or sell a property. Try to build in enough time so that you have some room to maneuver. Keep in mind that there are usually small changes that happen with the final closing costs as there are so many parties and factors involved. Sometimes after the loan is closed you may get an additional refund if some of the estimated charges were too high, such as the cost of the hazard insurance.