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Saving Money on Closing Costs

Mortgage979Mortgage ArticlesMortgage Loan

When shopping for a mortgage, most borrowers focus on trying to get the lowest interest rate. But you can also save a lot of money by paying careful attention to the fees paid at closing.

Fees can add up. In fact, some lenders use higher fees, or closing costs, to compensate for an interest rate that's lower than their competitors, but which actually ends up costing the borrower more over time.

Closing costs are the various itemized charges tacked onto your loan at closing. Ranging anywhere from a few bucks to several thousand dollars, they're supposed to be payment for specific services provided to you in setting up your loan. However, these fees can vary significantly from lender to lender and in some cases - so-called "junk fees" - do nothing more than pad the lender's profit margin.

Start with several loan offers

So how do you know what to look for? To begin with, shop around and obtain competing loan offers from several different lenders - at least three or four. Each will provide you with a "good faith estimate" detailing the interest rate they're offering AND a listing of the various fees, or closing costs, that will be charged along with the loan.

One thing you'll probably notice right away is that the fees vary from lender to lender - not just in what they charge, but also in the specific fees they charge as well. Part of that is because individual lenders may have their own terminology for naming the various or they may group several services under one name that other lenders bill separately for.

No matter. The key point is that you want to see what the total fee charges are. That's the bottom line. If one lender's fees are significantly higher than another's, they'd better be offering a very good interest rate to compensate.

About discount points

Before we go any further, a word about points. Points, also called discount points, are a way of buying down your interest rate by paying an extra charge. Each point costs 1 percent of the amount you're borrowing and allows you to lower your interest rate by a certain amount. Most of the very low mortgage rates you see advertised will usually be based on charging for one or two points.

Discount points are considered part of closing costs, since they're charged at the time the mortgage is closed. However, they're different from other mortgage fees because you have the option of whether to buy them or not.

When comparing loan offers, ask lenders to give you a rate quote with zero points - this will enable you to more easily make "apples to apples" comparisons between the different loan offers. Once you've seen the basic cost of the loan, you can always ask to see how buying points would affect things.

Some fees can be negotiated

Looking at the total of all fees, or closing costs, will let you see immediately how the charges vary from lender to lender. You can see how the fees affect your total cost over the life of the loan by comparing the annual percentage rate (APR) listed for each offer, which is a way of expressing the total cost of the loan in the form of an interest rate.

But you can go beyond that. With many lenders, certain fees will be negotiable, the origination fee in particular. This is the fee the lender charges you for the loan itself and it can be substantial. Loan officers often get a commission based on the fees the lender charges, so they have some room to negotiate in order to get your business. However, if you're dealing with a fixed-fee lender, your loan officer is paid a flat rate and doesn't have that flexibility.

Know what you're paying for

One thing you want to be sure of is to understand what services the fees represent, particularly if a lender is charging more for a certain service than the competition is or charges for things the competition does not. Fees for in-house services like document preparation or "lender inspection" are often "junk fees" that simply add to a lender's profit margin and don't reflect any specific costs the lender incurred in making the loan.

One fee you should not have to pay is an application fee for a lender to provide you with a loan quote. If they want your business, they'll provide you with a quote for no charge. The exceptions to this are if you have poor credit or unusually complex finances that will require more work than usual on the lender's part.

Third-party fees

On the other hand, there are certain third-party fees that are not negotiable or avoidable. These are to cover fees charged by other entities - such as for transfer taxes, appraisals, recording fees, express delivery of documents and the like.

These should reflect the actual cost of the service or tax charged by the third party, and should be consistent from lender to lender. However, some lenders will pad these charges to add to their own profits, so be wary if a lender is charging more than its competitors for the same third-party service.

Check out other providers

Finally, there are some third-party services you can shop for yourself, such as title insurance, title search, the property survey, pest inspection and the settlement agent or attorney (typically from the title company). The lender will often have ongoing relationships with providers of these services in your area and will suggest ones you can use, but that doesn't mean you need to accept their recommendation. Find out what the suggested providers charge and then look up other companies providing those services in your area to see if you might be able to save money using them instead.

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