Mortgage Closing Fees Surge: How to Keep Yours Low
First, the sort-of good news. The survey isn't measuring actual fees levied on completed mortgages; instead it measures the so-called good-faith estimates of fees on hypothetical $200,000 mortgages in different markets around the country.
New regulations have made it harder for banks to low-ball estimates, which means consumers can comparison shop more easily and don't have to worry about surprise fees at their closings. While banks are supposed to get as close as they can to the real costs of a mortgage, they are only penalized for going too low, not for overestimating. To be on the safe side, some have taken to showing consumers the worst-case scenario of what their loan might cost.
Anyone shopping for a mortgage these days should ask for a detailed list of fees in their good faith estimate, question anything they don't understand or that seems superfluous, and if possible, have a financial advisor who understands mortgages go over them, as well.
Actual fees, which Bankrate says can range from $3,000 to more than $5,600 depending where you live, have probably risen more modestly than the survey shows, but people in the real estate business say they have indeed gone up.
Even so, you don't have to pay whatever tab the bank puts in front of you. There is room for questions and negotiating, says Zev Fried, a former mortgage broker who answers a lot of mortgage questions as a financial advisor for JSF Financial in Los Angeles.
His advice for HousingWatch readers:
1. Look for extraneous fees
When Fried looks over good-faith estimates for his clients, the first thing he checks for are charges characterized as "processing" or "administrative" fees.
You can also request less-expensive title or escrow companies or shop around for them yourself: "Most people don't think of doing that because it is a hassle, but it could save a few hundred dollars," the financial advisor notes.
2. Look for redundant services
Some banks charge for both borrower and lender title insurance. Fried says that he's seen this himself on clients' fee schedules recently but notes that it's superfluous. Title insurance is a way to protect the bank if the title search you pay for misses a lien or ownership dispute on the property that could undermine your claim on the property after the sale closes. But you need only one title policy, not a separate one for the bank and yourself.
3. Avoid or minimize mortgage insurance
Banks like to see borrowers put at least 20 percent of the price of a home down in cash because it decreases their risk in several ways. A borrower with the wherewithal to save that sum of money is probably a better credit risk than someone who hasn't save a penny. And a borrower with 20 percent equity has more of a stake in the home and will make more of an effort to not default than someone who has put down little or nothing (as we've seen lately).
If you can't muster that big a down payment, the banks will bundle mortgage insurance into your monthly loan payment, and there might be an upfront fee as well, depending on the details of your loan. Even if you can't swing the full 20% down keep in mind that the more you can pay up front the lower your PMI will be. While it might seem like a small sum, it can add up to a lot annually and over the life of the loan.
According to one pmi calculator, putting down a 15 percent down payment on a $200,000 home purchase garners a mothly PMI fee of about $54 (or $646 a year). But, put down 10 percent or 5 percent and those fees jump to $93 a month ($1,116 a year) and $149 ($1,786 annually), respectively.
Putting off a purchase to stash away a little more savings can save a lot of money in the long run.
4. Consider a no-fee mortgage
Banks know that haggling over fees is a hassle, for them and for you, so they are often willing to waive all the upfront fees a mortgage can carry in exchange for a higher interest rate over the life of the loan. These loans can be a good deal or a terribly expensive, depending on how long you are likely to hold onto the house, Fried notes.
If you think you're ready to put down roots and sit tight for 10 or 15 years, paying a higher rate for all that time will cost you several thousand dollars more than you would have paid in closing fees and probably doesn't make sense. But if you think you might pull up stakes and sell in three or five years, you'll probably pay less in added interest than closing fees would have been and it can add up to real savings. Consumer Reports does a good job of running you through the numbers in its blog.
Even if they might not be the right fit, Fried advises clients to always ask any bank they are considering to show them what the cost would be for a no-fee mortgage from them. "This way you get an apples to apples comparison that shows you flat out who has the cheapest loan," he says.
If you decide to forgo this option and pay the fees you usually can -- and, with hundreds of dollars at stake, should -- negotiate those down.
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