Mortgage Closing Costs: It Might Get Weird
If you’re shopping for a home loan, you could see some strange-looking mortgage closing costs. For instance, you might rightly wonder why a lender would charge a courier fee when your documents all came via email.
From the all-inclusive “origination” charge to the dizzying array of miscellaneous “junk” or “garbage” fees, here’s what you need to know about minimizing mortgage closing costs.
It’s A Junkyard Out There
Lenders can be pretty creative when it comes to naming their fees. And many charges are so general that you can’t necessarily tell what they are for. For instance:
- Application fee — you pay this for the privilege of filling out a form, apparently.
- Underwriting fee — okay, see if you can get the loan without underwriting.
- Mortgage rate lock fee — bogus, unless your loan has a really long lock.
- Processing fee — isn’t that something your hair colorist might charge?
- Courier fee — because “email fee” sounds too silly.
- Email fee — oh, wait.....
- Credit report fee — that’s actually a third party fee and must be “passed through” with no markup.
- Administrative fee — if you don’t know what it is, call it “administrative.” Or “miscellaneous.”
- Miscellaneous fee — bingo!
- Wire transfer fee — another pass through. A legit charge.
- Document preparation fee — aka, “fee for pushing a button.”
- Commitment fee — just like when you promise to marry someone and they pay you a commitment fee. It could happen...
- Broker fee — so-called because it makes you “brok-er.”
If your head is spinning, stop worrying. The truth is that it doesn’t matter what they call the fees.
Mortgage Hamburger Charges
Nope, there is no such thing. Probably. But mortgage lenders could call their charges “hamburgers” and it would not matter.
When you shop for a home loan, the bottom line is the only thing that counts. Everything else is distraction from your mission, which is to get the best deal on your home loan.
Just look for “Estimated Closing Costs” on page one of the Loan Estimate disclosure that lenders have to give you within three days of your loan application. If you don’t want to apply for a mortgage just to get a Loan Estimate, ask lenders for it when you contact them for quotes.
Ideally, they will provide a real Loan Estimate, which obligates lenders under consumer protection laws. Alternatively, they may supply a “worksheet” or “scenario,” which is non-binding and offers less protection.
Closing Costs: The Good, The Bad, And The Silly
The second page of the Loan Estimate provides the details about your closing costs. The “Loan Cost” section lists what your lender wants to charge you. The total cost here is completely under the lender’s control and should be considered negotiable by you.
“Services You Cannot Shop For” refers to payments to third parties like appraisers and credit bureaus. Because the lender chooses the providers, look these numbers over and make sure they aren’t substantially higher than those of other competing lenders.
The “Services You Can Shop For” section includes things like title insurance and escrow services (in states where fees can vary and it’s legal to shop around). While many borrowers simply accept the lender’s or real estate agent’s choice for these providers, you may be able to save a ton by shopping.
For instance, title insurance can add thousands to your costs, but if the house was financed in the last few years, you may be able to snag a discount, or a “short rate.” No one else involved in the transaction will bother to inquire, and they won’t shop for the lowest premium for you.
Finally, the “Other Costs” part of Page 2 lists items that are not necessarily related to the loan. They are simply costs of the transaction — for example, tax services and transfer fees, or costs of home ownership, like property taxes and homeowners insurance.
What Are Today’s Mortgage Rates?
When comparing mortgage rates from competing providers, you can look at the stated interest rate. However, that doesn’t tell you what the costs are. You can look at the APR, which helps you compare identical loans with different costs and rates.
However, APR has some real shortcomings for shoppers. To make shopping easy, ask every lender for a quote for a specific rate, and choose the one with the lowest total lender and third party charges.
Alternatively, you can ask for quotes on “no-cost” mortgages and choose the lender with the lowest rate. Fixing one variable makes it much easier to spot the cheapest mortgage.