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4 steps to cut your closing costs
(Article by Kimberly Lankford from Kiplinger's Magazine, August 2004)
You can get your new mortgage for less. But you need to take the time to compare and read the fine print. It could save you thousands.
Scott and Cheryl Pempek had been in their brand-new home in Putnam, Conn., for less than two years when they decided to refinance their mortgage. After comparing deals from several lenders, they chose E-Loan, which offered a rate of 5.125% on a 30-year mortgage and charged one point (a point equals 1% of the loan).
Right after the Pempeks submitted their application, they got a call from a mortgage broker offering 4.99% and zero points. It looked like a great deal, but the Pempeks were suspicious. How could the lender offer a package that was so much better than anything else they had found?
Scott and Cheryl got their answer as soon as they asked the lender for a good-faith estimate of loan fees. "There were lender fees, broker fees, document fees, fees I'd never seen before," says Scott. "They added up to more than the fees E-Loan was charging, even when you included the points."
The Pempeks stuck with E-Loan and got a bonus when the title attorney made a scheduling error and cut his charge to make up for the inconvenience. When the Pempeks closed on their loan in April, they paid a total of $1,533 in closing costs, including a notary fee and charges for a title search and title insurance, plus $2,500 in points. By taking out a home-equity line of credit at the same time, they avoided paying additional fees that might have been charged had they filed a separate application for that later.
Wild variations in fees
It's possible to shop for weeks in order to save an extra one-eighth of a point on your mortgage rate, only to find yourself blindsided by thousands of dollars in unexpected closing costs when you sit down at the settlement table. A survey by Bankrate.com in November 2003 found that fees charged by lenders on first mortgages varied wildly, from $1,020 to $11,395 on a $180,000 loan. On paper, fees for refinancing a loan are comparable to those charged for first mortgages, although borrowers who refinance often have more leeway to cut a deal.
In the Bankrate.com survey lenders charged anywhere from $50 to $1,423 for lawyer or settlement fees, $150 to $1,161 for mortgage-broker fees and $25 to $400 for document preparation. There was even an ambiguous "processing" fee, which ranged from $37 to $595, but didn't seem to buy much of anything. "Some lenders try to make $5,000 off a loan that another broker might do for $2,000," says Gerri Detweiler, author of "The Ultimate Credit Handbook" and a mortgage broker in Sarasota, Fla. "It's difficult for consumers to compare costs because there are so many variables."
Making matters worse, you don't usually see the final list of charges (called the HUD-1 form) until you're under the gun at closing, scrambling to sign a giant stack of papers while everyone stares at you across the table.
A couple of years ago, Mel Martinez, then secretary of the U.S. Department of Housing and Urban Development, proposed rules that would make it easier for borrowers to shop for mortgages and compare lenders' fees well before closing. But working out the details proved complicated and, after Martinez left his job last December, the proposal was withdrawn -- "dying the death of a thousand interest groups," says Keith Gumbinger of HSH Associates, a publisher of mortgage data. Still, there are four things you can do on your own to avoid paying inflated closing costs.
Get started by shopping around
- Eliminate and negotiate. Start by comparing interest rates at sites such as Kiplinger.com, HSH Associates or MSN Money. Once you've focused on a few potential lenders, ask each for a good-faith estimate of fees. Lenders are required to give you an estimate within three days after you apply for a loan, and they may be willing to provide one even before you apply. The numbers can change before closing, but at least you'll be clued in if a low-rate loan comes loaded down with extra charges, as the Pempeks discovered.
With some lenders, you might get a detailed breakdown of as many as 10 to 15 fees, says Chris Larsen, chief executive officer of E-Loan. About 40% of the lenders in the Bankrate.com survey charged an "underwriting" fee, 45% charged a "processing" fee, 50% charged a "wire transfer" fee, 34% a "document preparation" fee, 14% a "funding" fee, 14% an "administration" fee and 2% a "commitment" fee.
"It's almost too much information that's not necessarily useful," says Larsen. "It looks complex, but the fees are just different ways of making a profit."
E-Loan, on the other hand, guarantees that it will charge only third-party fees. Rather than a hodgepodge of lender's fees, E-Loan's own costs and profit are incorporated into slightly higher rates and points than other lenders might charge.
Some third-party expenses -- such as taxes, government-recording fees and fees for an appraisal and flood certification -- are beyond a lender's control. But in many states you can shop for title insurance on your own, instead of accepting the lender's bid. And the lender's own fees are negotiable -- in fact, you may be able to eliminate some of them altogether.
If, for example, a lender is charging both a commitment fee and a funding fee, ask to have one of them erased. For every fee you don't understand, ask for an explanation and then challenge lenders to justify charges that appear out of line. Says Holden Lewis of Bankrate.com, "It's worth a shot to negotiate administrative fees, funding fees and document-preparation fees."
Raise any objections as soon as possible. As your closing date approaches, the lender will be less likely to accept changes. And if you have a good credit rating, use it as leverage. "The better your credit quality and the bigger your loan, the more likely you are to win concessions," says Gumbinger, even on appraisals and other third-party fees.
- Focus on the big picture. Although it's easy to get bogged down in the minutiae of fees, don't lose sight of the overall cost of the loan. "Compare apples to apples -- points, rates and total lenders' fees," says Scott Pempek. "You can call a fee by whatever name you want, but the real issue is how much it's going to cost you to get a particular interest rate for your mortgage."
Lenders offering unusually low rates may be loading up on fees, but the reverse can also be true. "The no-cost loan is a bit of a misnomer," says HUD spokesman Brian Sullivan. "Companies that are advertising extremely low closing costs or none at all are getting their money from a higher interest rate."
Whether it's better to pay lower fees or a lower interest rate depends on how long you expect to keep the loan. If you plan to sell your home or replace the loan in just a few years, paying lower fees upfront is more advantageous. A low interest rate becomes more important if you plan to stay put for a while. If you're short on cash, some lenders will give you the money for closing costs and roll it into the mortgage, sometimes at a higher interest rate.
Keep in mind that mortgage interest is tax-deductible. Points on a first mortgage are also fully deductible by you, regardless of who pays them (on a refinance, points are amortized over the term of the loan). Other closing costs are not deductible.
- Stir up competition. "It never hurts to remind lenders that you're looking at a variety of options," says Marc Eisenson, author of "Invest in Yourself: Six Secrets to a Rich Life."
When Don Weidenfeld wanted to refinance his home in Boca Raton, Fla., he found that closing costs varied among lenders by as much as $500 and interest rates by as much as one-half of a percentage point. Weidenfeld told his broker at Quicken Loans (with whom he had worked in the past) what other lenders were offering, and the broker was eager to match or beat their terms.
"I was able to save several hundred dollars on my closing costs," says Weidenfeld, "and one-eighth of a point on my rate." Because Weidenfeld expects to stay in his home for at least 10 years, he was looking for a low interest rate and was happy with the 3.75% adjustable-rate loan he negotiated.
- Verify fees in advance. Don't wait until you're at the settlement table to read the HUD-1 form that details your final fees. Even if you spot a fee that's unexpectedly high, you won't be inclined to do anything about it if the moving van is already packed and you're primed to close the deal. "Most people simply close their eyes, hold their nose and sign on the dotted line," says HUD's Sullivan.
Lenders are required to provide you with the HUD-1 form at least 24 hours before closing if you ask for it. Insist on getting the form, even if the lender seems less than enthusiastic about giving it to you. Compare the actual fees with the good-faith estimate. Some changes are legitimate -- taxes and escrow amounts may have been calculated more accurately, for example -- but "some lenders can sneak in additional closing costs if you're not careful," says Weidenfeld.
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