When you purchase a home or
refinance
a mortgage, the closing or settlement procedure can sometimes be a
stress-inducing and costly process. You want the loan to close
without problems, but what should you do when extra fees and hidden
costs emerge at the closing table?
Fortunately, you don't have to face sticker shock when you're
signing on the dotted line for your next mortgage loan.
Here are five tips to help you avoid junk fees and erroneous
closing costs
so you can sail through closing with the least amount of anxiety --
all while getting the best mortgage deal possible.
Tip 1: Recognize what's normal for your area and what's
not
Many
first-time homebuyers
-- and even some repeat buyers -- are shocked to discover that
closing costs can add a significant amount of money to their home
loan. In fact, mortgage pros say closing costs typically average
anywhere from 2 percent to about 4 percent of your mortgage.
But that's a general guideline; your actual closing costs can
vary greatly on a number of factors, including your specific
location.
"Closing costs really depend on what state you're in," says Jim
Pendleton, a Long Island, N.Y.-based loan officer with
Financial Services of America
.
Pendleton, who writes mortgages in all 50 states, recently
worked on a loan for a homeowner on the east end of Long Island,
where borrowers are subjected to an additional 5 percent mortgage
tax. "So their closing costs were closer to 9 percent," Pendleton
says.
"But in some states, where there's a flat fee for title
insurance, I can close a loan very, very cheaply -- down to about 1
percent of the mortgage," Pendleton adds.
Tip 2: Know the difference between junk fees and legitimate
fees
Closing costs generally fall into four categories:
- Lender fees
- Title and third-party fees
- Escrow and interest fees
- Government fees
So how can you differentiate between legitimate fees and junk
fees?
Government fees are non-negotiable, mandatory fees required by
your state, county or local municipality. While you might not be
happy paying these charges, they're all legitimate fees.
Escrow and interest fees are usually calculated based on loan
size and a lender's preset loan guidelines. For example, many
lenders may want you to escrow, or prepay, six months of property
taxes, Pendleton says.
But in the past, it's typically been lender fees and third-party
expenses that most homeowners grumbled about -- often because such
costs could change between the time a borrower applied for and
closed on a home loan.
Paying a lender's application fee is reasonable. But items
classified as "review," "administrative," "processing," or
"document prep" fees should be questioned. These are often inflated
fees simply charged to pad a lender's profits.
Tip 3: Use your good faith estimate the right way
Mortgage lenders are required to give mortgage customers a good
faith estimate (GFE) about fees and closing costs right up front,
at the time of a loan application. And new laws now require a
72-hour waiting period before a lender can do anything, such as
order an appraisal.
"It has to be accurate," Pendleton says of the GFE. "Nothing can
be hidden anymore."
Still, some adjustments are allowed to be made. Attorney fees,
for example, might increase if a borrower has unexpected or
additional legal services.
If anything changes prior to closing, lenders must send updated
disclosures and cannot close until three days afterward.
Even though the waiting period adds time to the loan process,
obtaining an initial GFE from multiple mortgage lenders can help
you comparison shop for the best mortgage rates.
Tip 4: Scrutinize your HUD-1 statement prior to closing
At closing, you will receive a HUD-1 statement itemizing all the
costs connected with your home loan. This HUD-1 form will show
costs you've already paid - such as appraisals or survey fees - as
well as remaining expenses outstanding, like transfer taxes or a
broker's commission.
The HUD-1, therefore, represents the final accounting of
everything you or a seller pays in connection with the mortgage,
including any seller credits if the transaction involves a home
purchase.
Because of its importance, it vital to not rush through this
phase. Carefully review your HUD-1 to make sure the fees reflected
are accurate and consistent with what you've previously been
told.
Tip: 5: Slow the process if necessary
For years, mortgage customers who wanted a preliminary copy of
their HUD-1 statement had to request it at least 24 hours before
closing. Now, new laws require that lenders automatically provide
the HUD-1 to borrowers no later than 72 hours before the closing
date.
This is your opportunity to review everything at your leisure,
not in a rushed manner at the closing table. So if you spot typos,
mistakes or extra charges, "you have the right to stop the clock
and make sure everything is right," Pendleton says.