Surprise expenses go hand-in-hand with homeownership. There’s the furnace that goes on the fritz, the ceiling that cracks, the lawn mower motor that refuses to turn over.
But, some buyers receive an initiation to the unexpected costs of homeownership before they even move in–or, in fact, before they even own the home. When they reach the closing table to seal their purchase, they can be surprised at how an assortment of miscellaneous fees, as well as some heftier charges for processing the transaction, can add up to a rather significant amount. Indeed, settlement or closing expenses can add close to 2 percent to the cost of a home, estimates Chris Christensen, vice president for marketing at the American Homeowners Foundation, a non-profit group based in Arlington, Va.
Some of the charges, such as local transfer taxes or title recording fees, must be paid in order for the purchase to go through, and can’t be negotiated by buyers. But there are other costs that frugal buyers can reduce or eliminate through smart bargaining tactics.
Collect estimates
The best way to cut costs is to find out what they are right at the outset, says Christensen. The federal government gave consumers a handy tool when it passed a law that requires all mortgage lenders to provide a “good faith estimate” of closing costs within three business days from the time a borrower makes a mortgage application.
When you’re shopping for a mortgage, telephone various mortgage lending companies, advises Christensen, asking not just what interest rates they charge, but also ask for them to mail or fax a good faith estimate of closing costs. “Lenders should be happy to provide you with a copy of the estimate,” contends Christensen. If they don’t, take your business elsewhere, he advises.
Says Reed Brunzell, loan consultant with Hartford Financial Services Inc., Chicago, “About once a month someone calls who asks me to fax them a copy of our closing costs estimate so that they can compare it with other lenders’ estimates.”
Christensen says that unless borrowers ask for the closing cost statement upfront, they probably won’t receive it until they formally apply–and tender an application fee of a couple of hundred dollars. Then, Christensen notes, borrowers are already committed to the closing charges, unless they want to forfeit their application money.
Begin bargaining
Armed with a detailed list of the expected closing charges from a couple of different sources, borrowers can ask a specific mortgage lender to eliminate or reduce fees, especially those charges that Christensen categorizes as “junk fees.”
These junk fees are charges under various names, but they all have one thing in common: They are payments for a lender’s time, and are not for a specific service the lender must perform, such as a credit check. To cover the costs of processing a loan, many lenders will charge an origination fee of 1 percent. But, asks Christensen, “why should he have to pay any more than that?” Some of the more common terms for junk fees, Christensen says, include “document processing fee,” “underwriting fee,” “escrow service fee,” and “tax service fee.”
Christensen says he has negotiated himself out of a $150 loan processing fee. “You can’t expect to knock out all of the junk fees. But if you insist that you want a reduction or you’ll take your business elsewhere, you’ll probably be able to cut some charges.”
Some lenders advertise no points, no closing fee loans, notes Bob Schnack, residential mortgage banker with Midwest One Mortgage Services, Melrose Park. But, in fact, the borrower does ultimately pay the fees in the form of a slightly higher mortgage interest rate.
Schnack illustrates that in mid-April a borrower at his institution who pays all fees would receive a rate of 8.375 percent on a 30-year fixed-rate loan. The rate on a no-fee loan would be 8.875 percent, he says.
In another variation, notes Schnack, some lenders eliminate the 1 percent origination fee and then charge a complete list of closing costs such as document preparation fees. The only way to sort out different lender programs is to carefully look at how the tally on the good faith estimate and the interest rate on a particular loan compares with other programs.
In addition, some lenders charge “loan discount points,” which is a percentage of the total loan amount requested, notes Schnack. When borrowers pay 1 or 2 percent of the loan amount upfront, however, they are granted a lower interest rate over the term of the loan. “This is something a borrower might want if he plans to stay in his home for a long time,” notes Schnack, “but if you don’t think you’ll be in the home long, you’re better off not getting one of these loan programs.”
Deal the deal
To avoid any surprises on closing day, says real estate agent Ed Sublett with Fee Simple Realtors, Lake Forest, “I’ve known borrowers who go down the list of expenses, and then say that they’ll give the lender their business as long as the lenders’ charges at closing don’t go over what’s listed.”
Indeed, experts say that the good faith estimate of closing charges is just that–an estimate–and the actual charges might vary by 10 percent more.
Christensen agrees that before a borrower tenders an application fee, he should have a lender sign the good faith estimate, promising that charges won’t exceed a certain maximum.
Complete estimate
The good faith estimate that you receive from a lender has a line for all of the closing charges, even those that aren’t recouped directly by the mortgage lender. Other listed charges include your lawyer’s bill and the title company charges.
“On the line for the attorney’s fees,” notes Brunzell, “I just usually put the letters `POC,’ which stands for paid outside of closing. Attorneys should negotiate fees separately with their clients, and that is between them.”
Lenders will usually, however, provide estimates of title company charges.
In the Chicago vicinity, it’s customary that the seller’s attorney select the title company that will handle the closing, and Bill Bond, vice president and owner of Mid America Title Co., Waukegan, says that many home buyers mistakenly think they have no say or bargaining power on title company charges.
“Because the seller’s attorney usually picks the title company, most home buyers don’t think title companies are competitive on their charges, but they are,” Bond says. “As soon as the purchase contract is approved, and the borrower has been approved for a mortgage, the seller’s lawyer will put in an order for the closing. The borrower should call the title company and get an exact listing of the charges, and then call around to other title companies and find out what their charges are for the same services. We are always willing to negotiate.”
A title charge that a buyer might successfully negotiate, says Bond, is the company closing fee, which is based on the price of the home being purchased (see accompanying story). “We are always willing to negotiate a flat fee rather than a sliding scale,” says Bond.
Jeff Gross, assistant manager of Chicago Title Insurance Co., agrees that the company closing fee can sometimes be negotiated. Gross adds that buyers also can go over the closing statement with their attorney the day before the closing, and have their attorney call the title company if they want to protest any particular charges.
Added outlays
If you’re making less than a 20 percent down payment, you may also be asked to ante about 0.73 percent of the mortgage amount you’re requesting at the time of closing to pay for private mortgage insurance, or PMI. However, recognizing that cash-strapped borrowers who make low down payments can find this a burden, lenders are increasingly offering borrowers the opportunity to spread the first-year PMI premium over small outlays tacked onto the monthly mortgage payment, says Schnack.
Another charge that’s a constant source of confusion to buyers, says Brunzell, is pro-rated mortgage insurance. “If you are buying or refinancing, you’ll always have to prepay interest at closing,” he explains. “When you make a regular mortgage payment, you are paying a lender for the interest that accrued during the previous month. So when you mail your mortgage (payment) on Jan. 1, you are paying December’s interest. When you are buying a home or getting a new mortgage, you pay the new lender for all the interest during the month that is due him. For instance, if you close on April 15, you pay the old lender for all the interest in the first 15 days of April, and you pay interest on the second half of April to the new lender. Your next mortgage payment to the new lender won’t be until June 1, at which time you’ll pay May’s interest.”
Continues Brunzell: “Some people think they save money by closing at the last day of the month. This isn’t true; it all evens out. But if you are short of cash, it can be to your advantage to close at the end of the month.”
Another way to watch costs is to keep an eye out for errors. Schaumburg real estate attorney Gerald Marcus says that buyers can ask their attorney to get a copy of the actual closing costs drawn up by the title company a business day before the scheduled closing. Then, the buyer and his lawyer can look for any discrepancies between what were the promised costs and the actual charges.
WHAT TO EXPECT TO PAY
We asked lenders, lawyers, and title companies to enumerate the closing charges home buyers should expect to pay.
– Lender fees. Many lenders will charge an “origination fee” of around one “point,” or 1 percent of the loan amount requested. Some lenders may also charge “loan discount points,” which a borrower may elect to pay in order to receive a lower interest rate on the mortgage.
Lenders also charge about $300 to cover a credit check and an appraisal on the property you’re buying, which is usually paid at the time of application. Other lenders’ fees reflect their charges for the time spent processing a loan. Such charges are often called “underwriting fee,” or “document processing fee.”
– Loan policy insurance fees. Buyers purchase a title insurance policy on their loan for their lender, costing about $150. Home buyers also pay an Environmental Protection Agency (EPA) endorsement on the property, which costs about $25. In some cases, such as when a borrower is taking out an adjustable mortgage or buying a condominium, other endorsements are required, costing about $50 each.
– Title company charges. The buyer typically pays a closing fee of about $170 for the first $100,000 of the price of the home being purchased and about 50 cents per $1,000 of the purchase price thereafter.
– Mortgage interest, property taxes and insurance. If you are putting down less than 20 percent on the purchase, your lender may require that you pay upfront the first year’s premium for private mortgage insurance (PMI), which runs about 0.73 percent of the loan amount requested. The first year’s premiums on homeowner’s insurance is also usually required. Pro-rated mortgage interest to the end of the month and pro-rated property taxes are also due, but will vary according to the property being purchased.
– Transfer taxes and recording fees. Some localities require taxes be paid anytime a property is sold or “transferred.” Also, recording a new mortgage and deed with the county can cost about $75.
– Attorney fees. Most buyers will not hire an attorney to help them with the purchase of their home unless they ask them about their fee, which can be a flat rate or hourly. The fee is also often paid outside of closing.
