Are You Getting a Good Deal on Closing Costs?

By Francine L. Huff
Calculators for Mortgages Columnist

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Not all mortgages are created the same. That's why it pays to shop around and compare mortgage deals. Even if two loan offers have the same interest rate, the closing costs could vary significantly. But because lenders aren't required to give you an estimate of closing costs before you fill out an application, it can be tough to know if you're really getting a good deal. So how much should closing costs be, and how can you get the information you need to make an informed decision?

What Are Closing Costs?

Closing costs are various fees charged when you purchase or refinance a home. The fees are for things such as processing your loan, doing a title search, and appraising a property, among other things. Closing costs may also include the number of points you pay to lower the interest rate of a loan.

Closing Costs Sticker Shock

Some buyers don't ask what are the closing costs or pay much attention to them, and end up surprised at how high they are at closing time. In many cases homebuyers end up overpaying for closing costs because they didn't take the time to compare fees and negotiate them. Use the closing costs calculator to get some idea of what you may have to pay out before you even begin shopping for a loan. Here are eight things to remember about closing costs.

• The totals are simply an estimate or range of charges because the lender may not know how much your settlement agent will charge or the amount that will go into any escrow accounts for tax and insurance payments.
• The Real Estate Settlement Procedures Act (RESPA) requires mortgage lenders to provide you with a Good Faith Estimate (GFE) of settlement charges three business days after you apply for a mortgage loan. More information on RESPA and closing costs can be found at the Department of Housing and Urban Development site.
• Before filling out a mortgage loan application ask several lenders what are the closing costs associated with their loans. Most lenders will say they can't give out this information until you actually apply for a loan, but insist that they provide you with some type of estimate if they want your business. In this tough housing market, you may have more leverage to get them to agree to disclose this information.
• Closing costs are negotiable. You may be able to get your lender to waive or reduce certain fees, especially if you have a better offer from another lender. Among the fees you may be able to negotiate are those for administrative tasks, courier service, or express mail. More than likely you'll have a tougher time negotiating third-party fees such as those for appraisals, attorneys, credit reports, or title insurance. Also try to get the seller of the home you're buying to pick up some or all of the closing costs.
• Watch out for "junk fees," which are excessive charges for processing or documentation. If you think you're being nickel-and-dimed over things such as underwriting, application fees, or settlement costs, get tough with your lender and ask that the charges be waived or reduced.
• So how much should closing costs be? Settlement costs will probably run you about 3% to 5% of the total price of the home you buy. That percentage should include taxes. If you're getting estimates higher than 5%, it may make sense to skip those loan offers.
• Compare the initial estimate of closing costs with the GFE to see how far apart they are. If the lender has tacked on more charges or the figures aren't what you expected, it may make sense to find another lender. You'll have to decide what are the closing costs you're willing to pay if the figures have changed a lot. If you use an FHA mortgage to purchase a home, or are refinancing and have enough equity, you can wrap some costs into the loan. Homebuyers who are using the $8,000 homebuyers tax credit to purchase their first home may also apply it to their closing costs--the government is still up in the air about how they will allow the credit to be used--at the time of purchase or only once taxes have been filed.

The Final Tally

You are entitled to receive a copy of the HUD-1 settlement statement at least one day before you are to close on a home loan. Make sure you get a copy and compare the fees with what was shown on the GFE.

 

 

About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.