Even
if you have bought a dozen homes, it is always a very stressful process.
You are spending a large amount of money on one item, there is always the
fear that you
are going to loose money.
Well, with closing costs, you
probably are loosing money.
Like a car lease, the closing costs
and fees are made to confuse the buyer. Most buyers don't understand all
of the things that they are being charged for when they close on their
home. This often leads to overpaying.
Lenders know that buying a home
creates vulnerability in a customer. After all the time waiting for
everything to go through, many buyers are willing to overlook small,
unexplained charges. Some might notice strange fees but don't want to
cause a fuss. They don't want to cause problems over, for example, $500 of
unexplained charges.
The government has tried to protect
home buyers in the closing process. Lenders are required by law to provide
borrowers with a good faith estimate within three days of application for
a mortgage. But there is no law that says closing costs must be provided
to the borrower before application. This makes it hard for a consumer to
compare the fees from one lender to another.
But this doesn't mean that you can't
shop around for the lowest closing costs. You should be alert and review
all of the fees between different lenders. If any lender really wants your
business, they will be willing to negotiate on the fees.
How to shop
around
You should contact as many as a dozen lenders when
looking for a mortgage. Most lenders will tell you about their different
mortgage programs and the interest rates, but you should also insist on an
estimate on closing costs. Not all lenders will comply. In this ever
competitive market, most lenders will be able to give you a
estimate of how much they charge for closings.
Once you have a few estimates, make
sure that the cost for each mortgage is relatively normal. Most settlement
costs, including taxes, will range between 3% and 5% of the total price of
the home. Costs estimates higher than this should be eliminated as
potential lenders.
Don't get wrapped up in only looking
at closing costs. Mortgages with lower interest rates may have higher
closing costs with points and other fees. If you know that you will be in
a home for many years, it may make sense to choose a lower interest rate
with higher costs, because it will balance out over the years. Sit down
and add up the numbers; it's the only way to know if it is worth it. If
you know that you will resell the house within a few years, you probably
should avoid paying any points.
Closing fees to
expect
Once you have narrowed it down to
the best estimates, you need to begin negotiating. Don't be afraid to use
the lenders against each other.
Fees that go to another business are
not usually negotiable. These fees include your title search, appraisal,
attorney's fees, credit report and title insurance. Just watch to make
sure that you aren't being overcharged for a service. If everyone charges
$50 for a pest inspection, you should question a $200 charge.
Fees that are the lender's cost can
be reduced. These include courier expenses, express mail and other
administrative charges. They are negotiable. Watch for "junk" fees that
are processing and documentation fees that are charged just for a profit.
Examples of junk fees include settlement costs, underwriting fees and
application fees, which are all the same thing. If you see charges for all
of these items, you need to start asking questions.
A final
negotiation
You can walk away from a mortgage
any time before closing. Your lender and broker both know this. Make sure
that your good faith estimate reflects the fees given to you in the
initial ballpark figure. The more costs they pile on you, the more
prepared you should be to go somewhere else if they aren't
removed.
If you are happy with your good-faith estimate, you
should still go ahead and ask for a copy of the HUD-1 settlement statement
at least one day before closing. This is the final calculations of all of
your costs. It will list each charge by line.
Compare this to your good-faith estimate to make sure that no last-minute
charges were added. If you notice there are some changes, but you don't
want to walk away and potentially lose your down payment, you can file a
complaint with the U.S. Department of Housing and Urban Development or sue
your lender.
Some lenders try to make money by
selling you other products along with your mortgage. The most common is
credit insurance, which protects you against foreclosure if you lose your
job and are unable to pay your mortgage. Don't buy it, it's a waste. You
may end up spending $50 a month for something that your lender would
provide for free. The bank will usually work with you to keep from
foreclosing - it's in their best interest.
I know it sounds like a lot of work,
but it will be well worth it in the end. Being very detailed before you
sign on the bottom line can save you hundreds of dollars, even enough to
paint all the walls the color you really want them to be.
Here is a list of closing
costs that you should expect to pay:
Points - These are fees that are
paid up front to reduce your interest rate. Each point equals 1% of the
mortgage amount. The more points you pay up front, the lower you interest
rate.
Application fee - This can range
anywhere between $200 and $300. Most lenders will charge an application
fee, but you can ask it be waived if you have excellent credit.
Credit check - This charge usually
amounts to around $25. Only in rare circumstances will the lender waive
this fee. But it never hurts to ask.
Attorney's fee - Fees range between
$350 and $1,200. They vary from area to area. In some areas you would hire
a title agent instead.
Lender's attorney fees - If you ask,
the lender may drop this fee that usually hits around $400.
Title search - A title search is done to make sure
that the property is clear of unpaid mortgages and tax liens. Depending on
the property, you can expect to pay over
$200.
Title insurance - This insurance
will guarantee the title is clean, even if a search has been conducted.
Expect to pay $360 for this service.
Appraisal fee - This fee usually
runs around $300. The lender requires a statement of your property's value
from an independent appraiser.
Inspections - The lender may require
that your home is inspected by a professional. This will usually cost you
$85. You may need to have the property surveyed, which will cost another
$200.
Local fees - They may also be called
recording fees. The fees vary greatly from place to place, but expect
around $100.
Document preparation - This fee is
highly negotiable as it covers the preparation of the final legal papers.
It is basically a junk fee. Expect to see a charge of $200.
