With mortgage rates at their lowest in 15 years, many home buyers might be tempted to take the money any lender is willing to give them and run.
But they`d be better off shopping around among several lenders to find out what kinds of fees each of them charges.
That`s what we did, to get a sense of how the costs associated with obtaining a mortgage-everything from ”points” to application fees-vary among lenders.
We consulted five of them:
– Mortgage broker Ken Deutsch, president of BancTrust Inc. in Chicago.
– Mortgage broker Mary-Carol Arado, personal loan consultant at Corley Financial Corp. in Chicago.
– Banker Henry Apfelbach, residential mortgage specialist with Harris Bank in Glencoe-Northbrook.
– Savings and loan association mortgage loan consultant Minda Boxer of Great Western Mortgage Corp.`s Lincolnshire office.
– Savings and loan marketplace manager Betsy Lidecker at Citibank.
We found that many of the costs associated with taking a mortgage and closing on the transaction don`t vary much from lender to lender, whether it is a savings and loan or a mortgage banking firm. For example, title and recording fees are set by the municipality in which the property is located. Purchasers incur a charge to record the new deed and mortgage and have the title insurance policy issued in their name. That cost is about $130. Cook County properties also require title insurance under the Torrens system of recording land or title, which involves an additional charge of about $100, though that is split by the seller and buyer.
And, several other costs are determined not by an outside source but by the purchasers, who choose, for example, their homeowner`s insurance, usually according to the price and contents of their property rather than the type and terms of their mortgage.
But what can be substantially different are the number of points (each one equal to 1 percent of the loan amount) the lenders charge for originating and processing the loan. The points, which the borrower pays upfront, can vary dramatically even for the same lender from day-to-day.
For instance, on one day in late October that we called the lenders, all said the points had increased recently because 30-year Treasury bonds were heading down, the stock market was fluctuating and the outcome of the Mideast peace talks seemed uncertain.
With an 8 1/2 percent interest rate, Corley Financial said it would charge 3 points, BancTrust quoted 3 1/4 points; Great Western quoted 4 points; and Harris Bank quoted an unusually high 1/4 points. Lidecker`s Citibank said she had no 8 1/2 percent rate then, but she could offer an 8 7/8 rate with 3 points.
Remember, the larger the loan, the more difference an extra point is going to make-in our scenario, the 1 1/4 point difference between Corley Financial and Harris last month would add up to $2,350-so shopping around can pay off even more for buyers in higher-price brackets.
More recently (see chart and below), the lenders` points were more similar.
Most lenders offer a variety of mortgage options. If a buyer has the cash and prefers to pay points upfront, he or she often can get a lower interest rate on the mortgage. Those without the cash might opt instead to pay no or fewer points upfront and go with a higher interest rate.
Other financial differences among the lenders queried included the amount of real estate tax escrow payments they required the borrower to pay to cover future tax bills, and a series of miscellaneous charges that some refer to as ”junk” fees. The most common of this latter group are the application fee, document preparation fee, tax service fee and messenger fees for speedy or overnight delivery of certain documents.
So we could make some kind of comparison, and update our figures from last month, we called each lending institution again last Tuesday to find out what kinds of points and fees each was then charging a borrower who wanted a 30-year fixed-rate mortgage at 8 1/2 percent interest. Unfortunately, two of the lenders could not offer that exact rate. Great Western`s rate was slightly higher, 8.55 percent, and Harris` was 8.625 percent. That means, as noted in the chart, that the monthly payments of principal and interest on their loans would also be slightly higher.
We based our calculations on a hypothetical buyer of a $235,000 property, able to make a 20 percent down payment and take out a $188,000 loan.
Among the five lenders polled Tuesday, we found a $1,285 difference between the lender charging the highest fees, Citibank ($6,054), and the lender charging the lowest fees, Great Western ($4,769)-again, though, Great Western`s interest rate was slightly higher. But even among the three lenders offering the same 8.5 percent interest rate, there was a $740 difference in fees.
Some observers contend that even when all the points, escrow payments and assorted fees are lumped together and tip the high end of the scale, they still are relatively small when compared with the overall costs associated with purchasing a home. ” `What`s $1,000 or $1,200 more or less at the closing?` is the attitude of some buyers,” says BancTrust`s Deutsch.
But others, like Boxer of Great Western Mortgage, say that buyers, especially first-time homeowners struggling to come up with a down payment, need to watch every additional cost, particularly those paid upfront and not tax-deductible. A couple of hundred dollars more here and there can make a difference in how future owners sleep at night, she says.
Following are the most typical extra charges that varied among the lenders interviewed. All demand close scrutiny:
– Points: These are the fees based on the percentage of mortgage money borrowed. Because one point is 1 percent of the loan amount, in this hypothetical scenario, each was equal to $1,880. Points on a first mortgage are paid upfront at closing and are tax-deductible in the year of purchase.
When we called them this week, BancTrust and Great Western were charging 2.5 points ($4,700); Corley Financial quoted 2.875 points ($5,405); and Citibank and Harris quoted 3 points ($5,640).
– Application fee. This generally (but not always) also covers the cost of doing an appraisal and obtaining a credit report. Citibank quoted a fee of $295; Harris Bank, Corley Financial and BancTrust quoted $275; and Great Western wanted $250-but it refunds it to the buyer at closing time.
– Tax service fee. This is a one-time charge to set up a method to pay taxes. Harris Bank does not charge for this service. The other lenders were within $10 of one another. BancTrust`s fees ranged from $59 to $69, depending on the lender it uses. Corley Financial quoted $60.50 and Citibank and Great Western each charged $69.
– Document preparation fee. This is a small fee to cover the paperwork, copying and time needed to prepare documents for a closing. Harris Bank and Great Western did not charge for this service. Citibank charged $50, BancTrust charged $125 and Corley Financial quoted a fee of $100 to $150.
– Underwriting fee. This is another charge some lenders tacked on to process documents. Corley Financial charged between $100 and $150; BancTrust charged $150. Citibank, Great Western and Harris Bank waived any such fees.
– Real estate tax escrow payments. These are required by most lenders so they`ll have enough money on hand to pay the borrower`s future taxes. ”We like to have a few months` worth-four to six-for a safe cushion,” explains Citibank`s Lidecker. Corley Financial usually requests anywhere from one to six months` worth; and BancTrust seeks two to nine months` worth. Great Western and Harris Bank proved the exceptions and said they let customers keep those dollars and pay their own taxes.
Because no lenders in Illinois are required to pay interest on the tax escrow money they hold for you, by having to fork over several months` worth of tax payments, you do lose out on interest you could be earning by holding onto that money and investing it yourself.
Miscellaneous fees charged by the lenders primarily included messenger service and overnight mail delivery. Most lenders absorbed these, though BancTrust said it sometimes charges $35 because so much paperwork has to be faxed, sent by messenger or delivered overnight to complete a deal in time.
Time and attention
In addition, there can be significant yet somewhat harder to measure non- financial differences among lenders in the services they offer. Some review application files in a matter of days while others require weeks, particularly now as refinancings are on the increase. Some routinely attend closings while others think that to do so is a poor use of time because the title company involved usually is present and acts as the lender`s agent.
To make the wisest decision, experts say, homeowners should comparison shop for the best financial terms and services. They need to ask not only about potential charges, but also how long a loan commitment is good for once locked in, with the answer secured in writing. They also should interview the person processing the application as well as the person taking it to be sure the transaction will be smooth throughout and completed as expected. And they should find out what the lender`s record is regarding selling mortgages out of state, which may complicate payments, and even ask themselves how long they probably will hold their mortgages. ”If a homeowner is going to be in a certain house just a few years, it becomes more expensive to amortize junk fees than if they stayed 25 or 30 years,” explains Deutsch.
Exactly how many lenders potential homeowners talk to should be based on what their comfort level demands. Some people are satisfied with two to three responses; others need to interview a dozen before resting assured they`ve covered their bases, says Janet Zell of Kahn Realty in Chicago.
Usually it`s best to start with a lender you have a good relationship with, one where you have a checking or savings account or one where you plan to bank, advises attorney John J. Vondran of the law firm of Ross & Hardies in Chicago. Based on what that institution offers, you may decide to stop or continue interviewing other sources.
Helpful hints
Many agents are particularly good at knowing which lenders cater to special needs. ”I know of some who let owners put down 10 percent; others who focus on two- and three-flats with income-producing units,” says Charlotte Newberger of Beliard, Gordon & Partners in Chicago. Adds Zell: ”Some mortgage brokers may have a special problem with condominium loans. The main point is you don`t want to be promised something and then at the 11th hour find that you`re not going to get the terms expected.”
Attorney Vondran also advises homeowners not to rule out mortgage brokers. ”In the past, I used to think they tacked on hidden charges and offered inferior service. That`s no longer the case. Many are as professional and competitive as other lenders. They no longer should be thought of as a second or third choice,” he says.
In fact, Mary-Carol Arado of Corley Financial Corp. thinks she and other mortgage brokers often meet the needs of their clients better than other lenders because of their ability to secure loans from a wider range of sources than she did when she worked as a lender at an area savings and loan.
And last, don`t be shy about trying to negotiate some fees. According to Deutsch, some lenders will negotiate terms and waive certain fees, though that will mean a slimmer profit margin for them.
Often the deciding factor may be a longstanding banking relationship between a borrower and a lender or a potential future relationship.
”If someone has a lot of money,” says Harris` Apfelbach, ”say $400,000 or $500,000 in a personal or corporate account with us, it may be advantageous to shave a little here and there. Every situation is different and we`re willing to talk.”
