Mortgage Closing Costs. What are they? Who Pays Them? Good Faith Estimate

What are Closing Costs?
Descriptions, Breakdowns, and More

Joe Metzler Group - Home Mortgage loans A number of parties are involved in the process of buying a house. They include the lender, appraiser, insurance company, your local government, realtors, inspectors, and an attorney or title company.

Each of these parties charge fees for their service in processing and funding your loan. The Lender's responsibility is to explain to you what the services and costs are, and to give you an estimate of the total costs when you apply for a loan. This estimate comes in the form of a document titled Good Faith Estimate of Closing Costs. It is only an estimate, but it should be very close to your actual costs. We are not allowed to pad, or add onto the costs charged by these other parties, but rather simply pass on what they charge. The vast majority of closing costs go to third parties, not your actual lender. An exact breakdown and description of closing cost charges are at the end of this web page.

Lenders and brokers are required by Federal law, known as the Real Estate Settlement Procedures Act (RESPA) to give you a booklet called "Settlement Costs and You" when applying for a mortgage loan. Click here to view and print a copy. (In Adobe Acrobat Format)

How to Compare Costs
Shopping is confusing. No matter what we're looking for -- from cars to refrigerators -- there's a built-in element of confusion. Why? Lack of knowledge. An unfortunate rule of thumb is that the less we know about something we need to buy, the more we can expect to pay for it.

Shopping for a mortgage is complex at best -- even for the savvy previous home owner. Daily rate changes, time-sensitive lock-in periods, points, lender's fees... plus the emotional element of probably the largest purchase any of us will ever make. Throw in to this already murky stew the ingredients of tricky rate advertising, commissions for every officer, agent and broker who 'helps' in your transaction, and the obscure differences between rates and fees. It's no mystery that many people settle for a mortgage that exceeds their monetary means out of sheer exasperation!

So, what can we do beside blow our top?

The answer is education. If we know how to shop for a mortgage -- the questions to ask, the language to speak, the tools to employ -- we then possess the knowledge to secure the best deal.

The following is a simple primer to shine a light of clarity into the darker corners of mortgage lending. Read everything, familiarize yourself with the terminology -- and see how easy it is to secure the best possible mortgage with the lowest possible costs.

"As your Mortgage Consultant, I will show you your different options. You tell me what you really want, and then I will advise you on what I think is best based on your needs and financial goals. I'm proud to provide solutions to each of my customers, no matter what their financing needs!" - Joe Metzler

Best Rate or Lowest Costs?
A common mistake shoppers make is to ask: "What's your best rate?." It is a logical question to ask, but does not give the response most borrowers need to make a proper decision. Borrowers must understand both rates and fees. Rates are only half the answer to getting the best deal. It is possible end up with the lowest rate but not necessarily the best deal.

Simply put, the lowest rate & the lowest fees do not go hand-in-hand. NO LENDER can offer both together. I can give you rock bottom rates, but it will cost you in fees. I can give you the lowest fees, but it will cost you in interest rate. Most lenders quote their best rate in combination with covering all third party fees (appraisal, credit report, title company, state taxes, county recording fees, etc) with 1% origination.

Tricky Quotes
As a lender, I don't mind losing a deal to another company if they can beat my rate and costs (which is rare). I DO mind losing deals to tricky advertising, and misleading quotes!

For example, when comparing loans, you were quoted: For a 30-year fixed $100,000 loan

Lender A has a rate of 7.000% with 0 points, 1% origination fee and $2000 in closing costs, plus prepaid's.

Lender B has a rate of 6.625% with 2 points, 0% origination fee and $600 in lender's fees, plus prepaid's.

Lender C has a rate of 7.000% with 0 points, and $3000 in closing costs.

Which has the better deal?

Lenders A & C are about equal.

Lender B appears to have a lower rate, with lower costs. But in reality is the most expensive of the three, and a classic example of tricky advertising. Usually not until closing do you realize you are paying $2000 in "points" to get that rate, plus $600 in "lender fee's", plus $2000 in other fee's (escrows, appraisal, recording fee's. title company fee's, etc.) Total cost = $4600.

The question you should ask is: "Which lender is going to charge me the least amount of money for the rate I want?"

Understanding Fees
Fees could be broken down into four categories:

Discount Points and Origination fees -- Convert these fees into dollar figures to better understand associated costs. For example: One point is 1% of the value of the loan. A discount point or origination fee of one point would equate to $1000 on a $100,000 loan.
Appraisal, credit report and county/state fees -- These fees do not vary greatly between lenders, but they do vary. Also, you should never ever pay an application fee! The most you should pay a lender 'up-front' is a credit report fee, and that should never exceed $55.00
Miscellaneous lender charges (application fee, broker fee, processing , funding fee, wire transfer fee, etc.) -- These are the categories where most lenders hide their fees.
Title/settlement charges-- Include title search, closing fee, survey, title insurance, etc. These fees are paid to a separate company from the lender, so in theory they should be excluded from a lender-to-lender comparison. You should keep in mind that these charges will need to be paid in connection with the loan.

Step-by-step process to get the "Best Deal"

Pick the program that best suits your needs.
Next, choose the rate you want. By choosing the rate first you eliminate one of the variables. You now can find out exactly which lender is charging you the least amount of money for the loan that you want.
Closing Costs / Lender Fee's. PAY CLOSE ATTENTION. Many lenders will give you a ridiculous number that has no bearing on your real total costs by saying "OUR closing costs" or "OUR lender fee's" are X amount. Ask instead for the "bottom line", the "total amount required to complete the transaction", or even "what is the exact penny I will need to bring to closing?" By asking in this manner, you eliminate 99% of the misleading games some lenders play in attempting to make their costs sound so much better than everyone else. Please review the actual closing cost information listed below. A general rule of thumb for any Minnesota loan is $2200 plus 1% of the loan amount.
Ask the lender for a "Good Faith Estimate (GFE)" of settlement charges to verify if they are willing to put their pricing claim in writing. If they are not - RUN! Make sure to tell them you want ALL costs from ALL sources involved in the transaction listed on the estimate. You do not want anything listed TBD (to be determined).
Review each Good Faith Estimate very carefully, especially if the estimate does not look exactly like a real final settlement statement (known as a HUD-1). Double check to make sure that EVERY cost associated with your loan is listed. All REAL competitive estimates should be very close in total dollar amount! All Mortgages Unlimited Good Faith Estimates will ALWAYS include every single dollar required to complete the transaction.
Still Confused? Fax or call me a copy of the other lenders Good Faith Estimate. I will be happy to review it with you. If it is a good estimate, I'll be the first to tell you. If it is a bad estimate, I'll help you understand how and why it is a bad estimate.

Will my estimated closing costs differ from the actual costs? Yes. In standard transactions, the difference between estimated and actual closing costs will vary. Any variances should not normally be a cause for concern if it is small. The final numbers should be very close if you were given a good, Good Faith Estimate. If you have questions about specific costs, call your loan officer. These differences between estimated and actual costs are a common source of confusion and frustration for borrowers. The main reasons for the difference between the estimated and actual costs are as follows:

Different investors charge different fees for processing your loan application. Therefore, your choice of a loan product will determine the actual investor’s origination cost, administrative fees, etc. Since you normally receive the Good Faith Estimate before you lock in a loan, our fees can only be an estimates. But they should still be close.
Your prepayment amount may vary. On a purchase, you might have to prepay certain expenses. To protect the collateral on their loan against your house, most lenders require you to prepay a year’s worth of insurance, as well as some property taxes up front. These amounts will vary and depend on many things, including the type of insurance you choose. You will also have to pay "days of interest" depending on what day of the month you close. This amount can vary greatly. We usually have no idea what day of the month you will be closing, so these costs are only estimated.
When you close. Pre-paid tax escrows vary greatly depending on the month you close. If we originally estimated your closing for January 25th, but you really close March 5th, the differences could easily be several hundred dollars.
Other fees may vary depending on which investor provides services for your application. For example, different title companies and appraisers have slightly different fee schedules, although they should be very close.

How do I pay closing costs?
Early on in the process you may write a check to the lender for an appraisal and credit report. At the end of the process, you may write a check to your title company to cover the difference of all the costs associated with the loan that could not be added to your existing loan. The title company will then transfer payments as appropriate to the other parties involved, including the lender, the insurance company, the local government, etc.