Closing a mortgage loan is the last step before you take ownership of a new house, but this final step can be a costly one. The Federal Reserve Board estimates that it could cost you about 3 percent of your total mortgage loan to cover all the closing costs and fees charged by your lender and third-party service providers. For a $200,000 mortgage loan, that comes out to $6,000, and in some parts of the country, closing costs run even higher. You might, with some simple negotiation, be able to reduce your closing costs.
Some of the costly closing fees are charged by your mortgage lender. Known as loan-origination and application fees, these fees are to cover the costs of running your credit, taking your income information, and verifying that you can afford your monthly mortgage payment. The Federal Reserve Board says that application fees can run as high as $640, while loan-origination fees can hit as much as $3,105. Title insurance, which protects your lender in case another financial institution or person has a legal claim against the home you've just bought, can cost up to $900, depending on where you are located. Then there are state fees and taxes that you might face. Depending on where your new home is located, these government fees can run as high as 3 percent of your loan amount, according to the Federal Reserve Board.
Good Faith Estimate
Three days after you apply for your mortgage loan, you lender is required under federal law to send you a copy of your Good Faith Estimate. This document lists estimated fees for closing your loan. It's important to study these fees before you reach closing day. Look for any fees that seem too high. If there are any fees you don't understand, call your lender for an explanation. The listed fees, as the name of the document suggests, are all estimates. They can change on closing day. According to federal laws, fees can change as much as 10 percent from what you see on your Good Faith Estimate.
Call Your Lender
Once you have your Good Faith Estimate, determine which fees are being charged by your lender and which are being levied by third parties. Third-party fees usually include the appraisal fee, title insurance, the cost of a real estate attorney, and city and state fees. Some fees, usually third-party ones, can't be negotiable. This includes the taxes that your local governments charge, the reserve funds you'll need for an escrow account, and county recording fees. Those fees charged by your lender, including your loan-origination and application fees, can be negotiated. Ask for a detailed explanation of what goes into every fee charged by your lender. Your lender might be willing to drop certain fees if you press. You must, though, be willing to walk away from the lender and find another. You can do business with any lender licensed to originate loans in your state, but if you're not willing to start the loan-application process again, you'll lose your leverage in negotiating settlement costs.
It might be more difficult to lower some of your third-party fees, but you don't have to use the third parties that your lender wants. For instance, you can shop around for a title company that charges less for your title search and title insurance. This can shave a significant amount of dollars off your closing costs. You might also search for a real estate attorney that charges a smaller fee.
If you're not happy with the fees that your lender is charging, and you have not been able to negotiate them down, you can always shop around with other lenders licensed to originate loans in your state. Ask these lenders for estimates of their closings costs over the phone. These estimates won't be as detailed as a Good Faith Estimate, but lenders should be able to give you an approximate percentage of the amount of your mortgage that their closing costs equate to. The interest rate that your lender charges will have a bigger impact than closing costs on how much your mortgage loan costs, so It might be worth paying slightly higher closing costs for a lender willing to give you a lower interest rate.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.