An Insiders Guide to Closing Costs

Before I break into my ever-so-biased opinion on closing costs, I wanted to take a second to welcome all of my new readers. Rumor has it people from all walks of life are now reading. With that in mind, I have decided to use this blog as a forum for good, rather than for evil. My goal is to take my years of experience, my general cynisim, and a little fun thrown in to keep the average guy from getting screwed by their mortgage broker......and to that end....

Closing costs are a simple fact of life when you get a mortgage. Even if it seems like there are barely any costs on your loan, they are there.....trust me! What most people don't know is that certain closing costs are completely negotiable. I will even throw you a bone and give you some negotiation tips that will actually work.

Within three days of applying for a mortgage, the lender or broker is required by law to send you a Good Faith Estimate of Closing Costs. This form outlines all of the fees the lender or broker intends to charge you at the time of closing. I will only cover the most common, and costly fees here. Fees marked with a * are negotiable. I will cover title fees and escrow deposits some other day.

*Origination Fee. This is the broker or lenders fee for doing the loan. This fee is pretty much all profit for the lender. Up to 1% is common and customary, but the less the better. A lender should be allowed to make some money for the work they do, but I have seen up to 3% in the recent past and that is insane!

*Discount Points. This is a fee charged by a lender for reducing the rate on your loan. It would be great if for every 1% you pay up front it would reduce your rate by 1%. Sadly, it's more like for every 1% you pay up front, your rate drops by .375%. If you plan on not refinancing in the next 5 years, these points are a good bet. Ask your lender to give you a few options on this, so that you can compare and figure out what is right for you. You are paying these people a lot of money....they should have to work for it!

*Broker Fee. If your broker is trying to charge you a broker fee and an origination fee, they are just plain greedy. These fees are the same....a broker's profit. Simply put, if you see both fees...either negotiate one of them away, or find someone else to do the loan for you. Greed makes me angry, and it should make you more angry. It's your hard earned money, after all.

*Processing Fee. In theory, I am OK with this fee. It should be from $300-$450. It pays for the people who actually do the real leg-work on your loan. However, if your lender is already charging a steep Origination or Broker fee (over 1.5%), you should ask them to waive this fee.

*Underwriting Fee. If you are working with a broker, most likely this is a fee charged by the lender who is actually buying your loan. If that is the case, this fee is not negotiable. If you are working with a direct lender, (Bank or name-brand mortgage company) just make sure the fee is under $500. Anything more is crazy.

****Application Fee. Unless you are going to your local Credit Union (who may charge a moderate fee to cover their actual expenses incurred), if a broker or other lender is charging you this fee, either ask the lender to waive it, or run screaming to another lender. This fee is pure greed, and 100% profit for the lender.

Appraisal Fee, Flood Certification, Credit Report, Tax Service Fee....these are all fees charged for actual services, and they will not be negotiable. Unless you have a multi-family home, these fees collectively should not be more than $500. FYI......most lenders will make you pay for appraisal and credit report up-front. This is normal, and makes sense......they have to hire outside vendors to do this work, and they will want to be paid whether or not you ever close your loan.

****Yield Spread Premium. Brokers are required to show you this amount, even though this is not a cost paid directly by you at closing. This fee is where a lender will pay a broker a premium for charging you a higher rate. The higher the rate they sell you, the higher the premium paid. So, in the end....you are paying a lot for this fee. This fee is a sneaky bastard, and the broker is not obligated to tell you until closing how much the lender paid them for selling you a specific rate. On your initial Good Faith Estimate, they will usually say "0-3%", and that is perfectly legal. To make sure you aren't getting duped, when you lock your interest rate, simply ask what they are being paid in Yield Spread. Most will be caught off guard by your industry smarts, and tell you the percentage. If the number is more than .50%, ask them to give you some more rate options....you could probably negotiate a lower rate for no extra cost.

I know there is a ton of industry jargon here, but when you are dealing with a broker or lender, they will show you a lot more respect if they know you are savvy! A sharp consumer can probably negotiate away 1-2% of their closing costs......may not seem like much, but on a $200,000 loan, that could be $4000 of your money that you get to keep!

If anyone has any questions on all of this madness, or needs some general advice, drop a comment!