How to Reduce Some of Your Mortgage Closing Fees

Shopping for a home loan might not be as easy as comparing carbs and calories on the backs of different cereal boxes.

But, borrowers can be assured that there's transparency in the closing costs of a mortgage, which can amount from 2 percent to 5 percent of their total home loan amount.

The Department of Housing and Urban Development (HUD) requires a Good Faith Estimate (GFE) that clearly discloses an estimate of the closing costs.

All lenders must provide borrowers with this estimate within three days of receiving their loan applications.

With oversight by the Consumer Financial Protection Bureau (CFPB), abusive lending practices have been put to a stop.

Trimming the Fat

The guidelines limit a lender from collecting a borrower’s funds and disbursing them as they see fit, often after adding a nebulous handling charge or some other such nonsense to pad the bill.

For example, a lender might list $500 for Federal Express courier charges on the closing statement when it cost the lender only $50.

“Now third parties, such as couriers, appraisers, title, etc., have to be paid directly,” said Ted Rood, a national mortgage lender based in St. Louis, Mo.

Additionally, the GFE has been tightened up to the point that it now has to be reconciled within a “10 percent tolerance” of the HUD-1 Settlement Statement, the standard national form used to itemize fees charged to the borrower by a lender or broker.

“So, if your lender’s GFE estimate is for $50 and it turns out to be $300 on the HUD-1, the lender is probably going to have to eat it,” Rood said.

Despite government reforms and new protections afforded to borrowers, home loan hunters still risk being exposed to excessive lending charges.

For example, because a GFE is issued after a borrower submits a mortgage loan application, how does the borrower reasonably compare the closing costs of, say, three different lenders, each of which might charge an application fee?

To be fair to lenders, it costs them money and manpower to generate each GFE, which is why many feel they’re entitled to mark up their services, especially when borrowers are just kicking the tires looking for the best deal.

If you'd like to run various mortgage loan scenarios, use our handy mortgage calculator.

“There’s a workaround for that,” Rood said. “We prepare what we call a non-binding GFE, which is an estimate of our closing costs.

Costs can be hard to pin down because, for instance,  a title company might not yet have been selected.”

Rood further noted the borrower can later use this non-binding GFE to compare with the standard GFE and the HUD-1 Settlement Statement.

In fact, he and many other lenders feel such a non-binding instrument is easier to decipher than the new HUD-mandated GFE.

“The new GFE is not so transparent,” Rood admitted.

Lender's Reputation Still Key

While a non-binding GFE saves the lender money and provides the borrower with at least a baseline for comparing costs, its value and validity ultimately depends on the lender providing it.

“You’re right,” Rood confirmed. “This early estimate is only as good as the person putting it together.”

So, a lender’s reputation counts perhaps more than ever in a heightened regulatory environment.

At some point, instead of hair-splitting and dissecting every charge, borrowers will have to trust that their lender is working in their best interest.

At some point, instead of hair-splitting and dissecting every charge, borrowers will have to trust that their lender is working in their best interest.

Meanwhile, to provide unwitting borrowers with another layer of protection, the CFPB also has been ratcheting up scrutiny of joint ventures between real estate agencies and title companies, as well as between lenders and title companies.

Because of the cozy connection involved in joint partnerships, borrowers can be steered toward using the partners’ services, even if others on the market are less expensive.

“With certain joint venture relationships you have to use their services, that’s just the way it is,” Rood said.

Although more transparency has come to closing costs, they can’t be totally avoided.

Rightfully, lenders must charge for the services and expertise they provide.

Successfully closing a loan involves many moving parts and subsequent fees, including origination and underwriting, credit checks, title searches, document preparation, government recordings and a long list of other items too numerous to mention here.

When reviewing your GFE, seek out redundancies.

If you want to know why you’re being charged separately for loan origination, loan processing and loan underwriting -- when they all seem or sound the same to you -- ask your lender for an explanation.

If the explanation proves unsatisfactory, negotiate a reduction in your closing costs or walk away.

Like the nutrition label on your favorite box of cereal, a loan will list all the essential elements that go into the final product or closing.

You may not recognize all the ingredients, but at least you’ll be better equipped at identifying the junk that’s not good for your financial health.

What Fees to Expect

For the most part, the majority of those looking to purchase a home, find information about the financing process overwhelming.

Nearly two-thirds feel that way, especially those under the age of 30.

Three-quarters of first-time buyers report feeling overwhelmed, versus 54 percent of those who have owned a home previously.

While 87 percent are confident they will find an affordable home loan, many don't know how to compute the costs of that loan, and most don't know where to turn for simple answers.

“The sheer amount of information can lead to confusion and stress," said Cameron Findlay, chief economist at Discover Home Loans. "Those looking to purchase should work closely with their lender and realtor to make sure they are comfortable with mortgage terms and understand the impact a loan will have on their finances.”

Prospective home buyers turn to a variety of different resources to help them make key decisions and understand the process.

For help determining whether buying a particular home would be a good investment, 66 percent of prospective buyers turn to real estate agents.

When evaluating mortgage terms and comparing offers, 59 percent turn to mortgage bankers.

Many find that it can be helpful in such an important financial undertaking to compile a checklist of all the possible hidden home purchase costs.

The Key Costs of a Mortgage

The total cost of a mortgage consists of four elements often referred to by the acronym PITI: principal, interest, taxes and insurance.

Principal represents the amount of money loaned to you.

Interest is the cost of that money calculated over time. Taxes are government assessments to pay for local services.

Insurance assures the value of the loan by protecting the home from damage or loss and assures the value of the loan.

To get an idea of what the latest mortgage rates are in your area, see below.

Your lender must document all the details of your loan so you know the amount of principal, interest and all fees involved, including loan points.

A point is equal to one percent of the total amount of your loan (not the purchase price of the home).

For a $200,000 mortgage, one point is $2,000.

There are two types of points.

A loan origination fee, sometimes called origination points, is paid to your lender for getting you the loan.

Discount points are, in effect, prepaid interest to lower your long-term interest rate.

In most cases, for property taxes and insurance, mortgage lenders will make the collection by allocating the amount you need to pay for taxes and insurance each month to your mortgage payment.

These collections are placed in escrow, a depository account that the lender manages.

Your county and city may levy taxes on your real estate property.

These taxes pay for government services such as schools, roads, police, and other community services.

Your annual tax is usually calculated as a percentage (factor) of your property's sale price.

You'll also be required to carry hazard insurance on your home to protect it against fire, flood or other natural disaster that could damage or destroy the home.

There may be other costs included in your escrow payment such as private mortgage insurance (PMI).

PMI is required on most loans with less than 20 percent down payment. It is designed to compensate the lender if the homeowner should default.

There are a few other expenses that may factor into your monthly home payment.

The most common of these affects owners of condominiums and are called homeowners association dues.

Homeowners within a shared complex pay monthly fees that cover the cost of building operation, maintenance, repairs and sometimes utilities.

Transaction Closing Costs

In any real estate transaction you have closing costs, some are covered by the buyer and others covered by the seller.

Examples of buyer closing costs would include escrow fees, appraisal and inspection fees, prorated adjustments for property taxes and homeowner’s association dues.

Each party in the transaction could pay all their own closing costs, but sometimes deals are negotiated in which one side pays some or all of the other side's costs.

It's nearly impossible to determine the exact amount of closing costs prior to closing because there are so many variables involved and so much can change between the date the purchase offer is made and the date of closing.

However, your escrow officer or real estate broker should be able to provide a reasonable estimate.

Still More Hidden Home Purchase Costs

After listing all the different costs associated with the purchase, the mortgage loan and the escrow, don't forget to consider and budget for the indirect costs.

Your new home may need improvements like new carpet, paint, counter tops, or any number of other expenses. 

Improving a "fixer-upper" will of course cost more.

And over the life of a home you may need to repair or replace roofs, furnaces, windows, or almost any other feature of your home -- so budget for maintenance.

If it's your first home, you may need additional furnishings for it.

Coming from a small place you may find utility costs a surprise because water, lights, heating and air conditioning for a bigger house are more expensive.

Finally, moving your household into your new address can also be a considerable expense depending on how much and how far you're moving.