CHAPTER 14

Closing Costs and How to Save on Them

Closing costs are a necessary evil when buying a house. Sorry, that’s the way it is. There are lots of people involved in your transaction; most you’ll never even meet. And they’re all doing stuff needed to close your deal.

14.1 WHAT TYPES OF CLOSING COSTS CAN I EXPECT?

You can expect a lot of them, most of which you will never pay again until you get another mortgage. Closing costs can vary based upon locale, but generally you can anticipate your closing costs to average just about 3 percent of your loan amount, more if you pay points or origination fees to your lender.

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Here is a list of potential charges and services, divided between lender and nonlender fees, that you can anticipate when you get a mortgage loan. Not all lenders charge them all. The fees are estimates and can vary according to where the property is located.

Real estate agent fees are not part of the good-faith estimate that is sent to the borrower. Depending on where you live, there may also be fees for miscellaneous inspections, such as radon testing or termite inspections, but those requirements vary from state to state.

14.2 WHY ARE THERE SO MANY CHARGES?

Because there are a lot of different businesses that are active in your account. Nonlenders charge to cover their services. So do lenders. But lenders charge fees at the beginning of a loan to help offset some of their initial overhead when processing a new loan file.

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Lenders can make money in three basic ways from a new mortgage:

1. Collecting lender or broker fees at the very beginning of the loan. This is the only way a mortgage broker makes money. Once the loan closes, the broker makes no more money on that file.

2. Collecting the interest payments on the loan.

3. Selling the loan to another lender.

Only lenders can make money on interest payments or selling the loan.

14.3 WHY DO LENDERS CHARGE FEES?

Because they can. If your local market has established that most lenders charge a $200 application fee, then you can expect that fee. Lenders charge fees to offset the initial expenses of finding and funding a mortgage loan request.

In addition, due to the initial overhead of finding and closing a mortgage, the mortgage company may not begin to show a profit on any particular loan until well past the first year of the new loan’s life. Yes, the lender is collecting interest payments, but the lender also paid the salaries and benefits of the loan officers, loan processors, underwriters, and managers of the company, along with rent, payroll taxes, and any other associated costs of doing business. Sometimes lenders attempt to offset such costs with these other fees.

14.4 ON WHICH CLOSING COSTS CAN I SAVE AND WHICH ONES CAN I FORGET ABOUT?

You can only save on closing fees that can be negotiated. Your loan officer is bound to quote a standard set of fees the lender charges. If a lender charges a $350 processing fee and a $400 administrative fee, there is very little leeway, if any, to have a lender fee waived. Loan officers are required to provide the same set of fees to borrowers under the same set of circumstances. Just as loan officers cannot quote different interest rates to different borrowers under the same scenario, loan officers cannot waive a $350 processing fee in order to get the deal in-house. Rules require any fee waiver to be applied universally.

There can be provisions when the loan officer can in fact waive a particular fee based upon “competitiveness,” which means the loan officer was forced into a competitive situation and the only way to get the loan was to match another lender’s offer.

14.5 ARE FEES FOR PURCHASES AND REFINANCES THE SAME?

They can be, but some of them will be different. When refinancing, you can get discounts for reissued title policies, and if your lender requires a survey you can sometimes use your old survey instead of paying for a new one. If you’re buying a home, then you may not have much luck negotiating reduced fees for title work or lawyer fees. Your sales contract will identify who will be holding your loan closing, where it will be held, and who will issue your title insurance.

14.6 HOW CAN I SAVE ON MY APPRAISAL FEES?

A typical fee for a conventional appraisal is $300. But with the advent of AUS applications, sometimes those approvals also come back with reduced appraisal requirements. Appraisals come in five varieties:

1. A full-blown appraisal with interior and exterior photos, costing around $300.

2. An exterior appraisal only with photos, costing around $250.

3. A “drive by” appraisal that might cost $100.

4. An automated valuation model (AVM) costing under $100. An AVM electronically scours public records for recent home sales in the subject property’s area to estimate approximate value.

5. An appraisal “waiver,” which eliminates the need for an appraisal altogether.

What determines the type of appraisal you’ll need? It’s determined by your approval from your AUS. If you have little or no down payment and average credit, don’t expect any reduced appraisal requirements. However, if you’re a high-FICO borrower with 20 percent or more down, ask your lender if your approval qualifies you for a reduced appraisal, which will allow you to save a couple of hundred bucks. For an appraisal waiver, this can only be issued by the Automated Underwriting System and is based on a variety of factors such as credit, equity, income, and assets.

14.7 HOW CAN I SAVE ON MY CREDIT REPORT?

Your credit report, offered by an AUS, can be the source of another cost savings. In the past, the Residential Mortgage Credit Report (RMCR) would cost $70 or more and would take three to five days to get from the credit reporting company. But with automated underwriting, many of these systems pull their own reports and provide a credit report to the lender utilizing the AUS for a loan decision. Ask your lender if they really need an RMCR and your $70, or if they can get what they need with an AUS credit report.

14.8 HOW CAN I SAVE ON TITLE INSURANCE?

If you’re refinancing, there may be discounts if you use the same title agency. Some call this a reissue of an original title report, which can cost much less than a full title insurance policy. This is something you need to ask for. Don’t assume the lower policy premium will be offered automatically because a full title policy costs more than a reissue.

In several parts of the country, one business will offer several services, especially when it comes to title insurance. One office might be able to hold your closing, research your title, issue a title insurance policy, and make sure all your documents are properly recorded. While you may not be required to have everything done at one business, you’ll get package discounts for these settlement services if you choose to do everything under one roof.

14.9 WHAT EXACTLY IS THE GOOD FAITH ESTIMATE?

The Good Faith Estimate has had a name change and is now referred to as the Loan Estimate. It’s a long form, divided into six sections that are numbered—strangely I might add. The section numbers are 800, 900, 1000, 1100, 1200, and 1300, and they are assigned as follows:

Because lenders are responsible for producing this estimate, they will typically know exactly what their own fees (800 series) are, but they’ll be less certain about third-party charges for title insurance or attorney charges. Most loan officers who have been in business for any length of time should be able to provide you with a fairly accurate quote. The accuracy of the quote will be compared to the Final Closing Disclosure you will receive three business days before you attend your loan closing.

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When your loan officer quotes lender fees, they cannot be different than the ones shown on your final closing statement. There is no variance allowed and if the lender fees at settlement are higher than originally quoted, the lender must make up the difference.

Regarding nonlender fees that you do not have the ability to shop around for on your own, there can be a variance of no more than 10 percent of the original quote. Anything more must again be paid for by the loan officer. Finally, closing costs that you do have the ability to shop for can vary by any amount.

When you attend your final settlement, you will then encounter the TRID, or the TILA-RESPA Integrated Disclosure. That’s a mouthful but it is a combination of the Truth in Lending and Real Estate Settlement Procedures Act. TRID will list the final closing costs, amount borrowed, annual percentage rate, and other details about your loan. Closing costs listed on the TRID should be the very same as the Final Closing Disclosure.

14.10 HOW DO I USE A LOAN ESTIMATE TO COMPARE LENDERS?

First, you need to identify which fees count and which fees don’t. Items in the 900 and 1000 sections—the items the lender wants you to prepay in advance—won’t vary from one lender to the next. Why? Lenders have no control over your property taxes. Lenders have no control over the cost of your homeowners insurance policy; likewise, they have no control over your escrow or impound accounts. These numbers will be estimated, and don’t be surprised to see three different quotes for taxes and insurance on three different estimates. I’m not kidding. But disregard these fees when comparing closing costs.

Second, you need to ignore other third-party charges, because the lender you select has no impact on tax rates, attorney charges, title insurance, or any nonlender costs. Sure, I know there are controlled business arrangements that might offer settlement charges at a discount if you choose to “bundle” these services together, but those instances are the exception, not the rule. Only compare fees in the 800 section.

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I recently had a client who told me that my rates were too high. Not just a little higher, but a solid 1/4 percent higher than a competitor. I asked to see my competitor’s Good Faith Estimate and I immediately spotted the culprit. Nearly $2,000 in junk fees.

That’s a lot of fees. I would be happy to match that quote if I, too, could charge $1,950 in junk fees.

The loan officer was also low-balling all the other charges, from property taxes to title charges. Instead of taxes being realistically quoted at $350 per month, they were quoted at $100 per month. Hazard insurance was ridiculously low. Title policies were quoted at $150 instead of $600. The list went on. This is a not-uncommon trick. Consumers, when reviewing a Good Faith Estimate, zero in on the bottom line of the closing fees. “Gee, honey, ABC Bank charges $3,500 and XYZ Bank charges $3,000. Let’s go with XYZ Bank.”

But the line details tell another story. The loan officer increased his lender fees—a lot—while at the same time quoting unusually low third-party fees to offset the increase. If you want to do what many people do, simply pick up the phone and ask the various third parties what their charges are. Pay little attention to any fees other than those listed in section 800 of your quote when comparing one lender to another.

14.11 WHAT IS APR, AND DOES IT REALLY WORK?

If used properly, it works great. The problem is that some loan officers don’t know how to calculate the annual percentage rate (APR). The big mistake comes in two ways: One, the loan officer may calculate it incorrectly, and two, the APR is only effective when used to compare the exact same loan from two different lenders.

Comparing one loan to another is difficult enough without clouding it with an APR number. The APR is an excellent consumer tool, but all too often it’s shoved aside by some loan officer who either doesn’t understand it or doesn’t want to quote it because his rates are higher. I’ve often heard consumers say that other loan officers told them that the APR is “just a number crunched from a computer” and to pay little attention to it. Yeah, right.

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You should pay attention to the APR and you should pay attention to loan officers who can explain it to you. Some critics of the APR being used as a consumer tool point out that it doesn’t work for loans with little or no money down. For instance, most loans with 5 percent down require private mortgage insurance (PMI). But when calculating the APR for loans with PMI, the calculation makes the incorrect assumption that mortgage insurance will be in existence for the life of the loan.

Not true. PMI is only needed when the mortgage balance is more than 80 percent of the value of the home. “Aha!” say the skeptical loan officers. The APR is meaningless because it confuses the PMI issue with loans less than 20 percent down. Or so they say.

But if both lenders use the same loan amount, the same loan, and the same PMI policy, the APRs will still be a useful tool for the consumer. Will there be PMI for the life of the loan? Of course not. But by using the APR quote from both lenders, using the same loan parameters, the consumer can still tell who has the better deal by looking at the lower APR. If both lenders quote under the exact same circumstances, the lower APR is the better deal.

14.12 HOW CAN I GET THE SELLER TO PAY FOR MY CLOSING COSTS?

First and foremost, you have to ask. That’s part of your or your agent’s job. The seller isn’t going to give something up that he doesn’t need to give up, but the first thing to do would be to make the request as part of your offer. If a home is for sale at $100,000, make an offer you believe is fair and request that the seller pay X percent of your closing costs. What do you have to lose? If the seller says “no” and you still need or want the seller to pay your closing costs, change your offer.

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If you want the seller to pay $2,000 of your closing costs and the seller refuses, increase your offer by $2,000. That way the seller still gets the same amount, the sales concession is within guidelines, so as not to affect the value of the home, and you’ve saved $2,000. If you planned to put 20 percent down, your sales price would increase by $2,000, and your loan would increase by $1,600 (80 percent of $2,000). Sure, your principal balance goes up, but your monthly payment only rises by $27 on a 30-year mortgage at 7 percent.

There are those who wouldn’t advise this strategy, complaining that a $27 extra payment adds up to over $9,700 over the life of the loan. And that complainer would be right. But in reality, who keeps a mortgage for 30 years?

Why not ask the seller to pay for a discount point or two in the very same fashion? If the seller declines to pay points on your behalf, simply increase the offer by a similar amount. Using a $200,000 offer, have the seller pay for two discount points to buy down your interest rate. You might pay $3,000 in closing costs, but the seller is now buying down your interest by nearly 1/2 percent. If you were getting quoted 5 percent at par from your loan officer and your seller agreed to pay two discount points to buy down your rate to 3.5 percent on a 30-year fixed-rate mortgage, the math works out this way: With a $200,000 loan, 30-year fixed at 4 percent, the monthly payment is $1,176. A rate cut to 3.5 percent drops that payment to $1,140, or a savings of $36 per month. After the first five years, the buydown saves you more than $2,100 in mortgage interest. And over the life of the loan? You save $12,960.

14.13 CAN A LENDER PAY ALL MY FEES?

Certainly, and there are lenders who advertise that they will pay all fees for you. And not by increasing your interest rate in order to do so. This is a different promotion than simply covering closing costs with higher rates. How?

Good question. The fact is that people in a real estate transaction want their money. People like attorneys or title insurance companies. Still, you may see advertisements where the lender does offer to pay all those costs without increasing your rate. But it doesn’t wash. When a lender advertises they have a mortgage loan with no closing costs, all you need to do is call up that lender, get their rate quote, then compare that quote with other mortgage lenders and brokers for the exact-same scenario. Every time I see those ads, I call up that lender, pretend I’m a borrower, and see what their quotes are. And they’re nothing special. In fact, they are higher, albeit slightly. It doesn’t take a whole lot in a rate increase to offset loan costs. Sometimes as little as 1/8 percent is enough.