Buying - Cut Those Closing Costs

Even if you have bought a dozen homes, it is always a very stressful process. You are spending a large amount of money on one item, there is always the fear that you are going to loose money.

Well, with closing costs, you probably are loosing money.

Like a car lease, the closing costs and fees are made to confuse the buyer. Most buyers don't understand all of the things that they are being charged for when they close on their home. This often leads to overpaying.

Lenders know that buying a home creates vulnerability in a customer. After all the time waiting for everything to go through, many buyers are willing to overlook small, unexplained charges. Some might notice strange fees but don't want to cause a fuss. They don't want to cause problems over, for example, $500 of unexplained charges.

The government has tried to protect home buyers in the closing process. Lenders are required by law to provide borrowers with a good faith estimate within three days of application for a mortgage. But there is no law that says closing costs must be provided to the borrower before application. This makes it hard for a consumer to compare the fees from one lender to another.

But this doesn't mean that you can't shop around for the lowest closing costs. You should be alert and review all of the fees between different lenders. If any lender really wants your business, they will be willing to negotiate on the fees.

How to shop around

You should contact as many as a dozen lenders when looking for a mortgage. Most lenders will tell you about their different mortgage programs and the interest rates, but you should also insist on an estimate on closing costs. Not all lenders will comply. In this ever competitive market, most lenders will be able to give you a estimate of how much they charge for closings.

Once you have a few estimates, make sure that the cost for each mortgage is relatively normal. Most settlement costs, including taxes, will range between 3% and 5% of the total price of the home. Costs estimates higher than this should be eliminated as potential lenders.

Don't get wrapped up in only looking at closing costs. Mortgages with lower interest rates may have higher closing costs with points and other fees. If you know that you will be in a home for many years, it may make sense to choose a lower interest rate with higher costs, because it will balance out over the years. Sit down and add up the numbers; it's the only way to know if it is worth it. If you know that you will resell the house within a few years, you probably should avoid paying any points.

Closing fees to expect

Once you have narrowed it down to the best estimates, you need to begin negotiating. Don't be afraid to use the lenders against each other.

Fees that go to another business are not usually negotiable. These fees include your title search, appraisal, attorney's fees, credit report and title insurance. Just watch to make sure that you aren't being overcharged for a service. If everyone charges $50 for a pest inspection, you should question a $200 charge.

Fees that are the lender's cost can be reduced. These include courier expenses, express mail and other administrative charges. They are negotiable. Watch for "junk" fees that are processing and documentation fees that are charged just for a profit. Examples of junk fees include settlement costs, underwriting fees and application fees, which are all the same thing. If you see charges for all of these items, you need to start asking questions.

A final negotiation

You can walk away from a mortgage any time before closing. Your lender and broker both know this. Make sure that your good faith estimate reflects the fees given to you in the initial ballpark figure. The more costs they pile on you, the more prepared you should be to go somewhere else if they aren't removed.

If you are happy with your good-faith estimate, you should still go ahead and ask for a copy of the HUD-1 settlement statement at least one day before closing. This is the final calculations of all of your costs. It will list each charge by line. Compare this to your good-faith estimate to make sure that no last-minute charges were added. If you notice there are some changes, but you don't want to walk away and potentially lose your down payment, you can file a complaint with the U.S. Department of Housing and Urban Development or sue your lender.

Some lenders try to make money by selling you other products along with your mortgage. The most common is credit insurance, which protects you against foreclosure if you lose your job and are unable to pay your mortgage. Don't buy it, it's a waste. You may end up spending $50 a month for something that your lender would provide for free. The bank will usually work with you to keep from foreclosing - it's in their best interest.

I know it sounds like a lot of work, but it will be well worth it in the end. Being very detailed before you sign on the bottom line can save you hundreds of dollars, even enough to paint all the walls the color you really want them to be.

Here is a list of closing costs that you should expect to pay:

Points - These are fees that are paid up front to reduce your interest rate. Each point equals 1% of the mortgage amount. The more points you pay up front, the lower you interest rate.

Application fee - This can range anywhere between $200 and $300. Most lenders will charge an application fee, but you can ask it be waived if you have excellent credit.

Credit check - This charge usually amounts to around $25. Only in rare circumstances will the lender waive this fee. But it never hurts to ask.

Attorney's fee - Fees range between $350 and $1,200. They vary from area to area. In some areas you would hire a title agent instead.

Lender's attorney fees - If you ask, the lender may drop this fee that usually hits around $400.

Title search - A title search is done to make sure that the property is clear of unpaid mortgages and tax liens. Depending on the property, you can expect to pay over $200.

Title insurance - This insurance will guarantee the title is clean, even if a search has been conducted. Expect to pay $360 for this service.

Appraisal fee - This fee usually runs around $300. The lender requires a statement of your property's value from an independent appraiser.

Inspections - The lender may require that your home is inspected by a professional. This will usually cost you $85. You may need to have the property surveyed, which will cost another $200.

Local fees - They may also be called recording fees. The fees vary greatly from place to place, but expect around $100.

Document preparation - This fee is highly negotiable as it covers the preparation of the final legal papers. It is basically a junk fee. Expect to see a charge of $200.