Anyone who has ever closed on a house knows the large amount of paperwork that must be signed. The process is stressful, and many people are not careful to look over all of the paperwork completely before signing on the dotted line. What many people do not realize is how many expenses may be added to the loan papers that careful reading and shopping around could have prevented.
Before you close on a mortgage loan, you will receive a good faith estimate of closing expenses. If you are obtaining a mortgage through a direct lender the good faith estimate should be relatively accurate. If you are using a mortgage broker, the statement will be slightly less accurate. The good faith estimate includes all charges that the buyer is subject to when closing the loan. Because you receive the good faith estimate early in the loan approval process, it makes sense to visit more than one lender to determine who has the lowest closing costs. This also gives you plenty of time to review the paperwork so that you can ask about any strange charges that may appear on the estimate.
Unnecessary fees at closing
There are many legitimate expenses as part of the closing process, but some companies also add unnecessary, or duplicate, charges to increase their profit. If you notice questionable expenses as part of the closing statement, you can attempt to negotiate them away with the lender, or choose to go with a different loan provider. Some charges that are legitimate are appraisal and home or pest inspection fees. If you see listings for underwriting fees, document preparation fees, warehousing or loan review fees or tax service or real estate broker administration fees, you may want to question them to the lender.
Fees that are paid to a third party, such as appraisal, credit report and title insurance fees are probably legitimate, but for any fee paid to a third party, the lender should be able to tell you exactly what you will receive in return for your money.
You may be asked to pay points on your loan. Points are a specific amount, usually each point equals between one and two percent of the total amount borrowed, that you can use to reduce your interest. For each point that you pay, you should expect a one-eighth reduction in the interest rate on your loan, for the life of the loan. No cost, no fee loans have a higher interest rate. How to decide which is right for you? Everyone has a different situation, but generally, if you plan on staying in the house for some time, roughly ten years, it makes sense to pay points and take advantage of the lower interest rate. Not staying in the house for long? Take the loan with no closing costs and pay the higher interest rate.
Unnecessary fees over the life of the loan
There are fees and stipulations that are written into the loan document that can effect you over the life of the loan. Before signing on the dotted line, ask if there is any prepayment penalty. A prepayment penalty is a fee that you may be required to pay if you pay off your loan before the end of its term. Another hidden problem in some loans is negative amortization. If a loan has a NegAg, or negative amortization, the unpaid interest on the balance of the loan is added to the loan balance. The final piece of information that you should check your loan papers for is a YSP, or yield spread premium. The yield spread premium is a cash rebate that the mortgage broker receives outside of closing. It is based on signing the homeowner up for a higher interest rate than they qualify for. While this does not increase your out of pocket cost, it does increase the amount of your monthly payment, and the amount of interest paid over the life of the loan.
How to prevent losing money on your mortgage
The most common scenario when encountering unnecessary fees on loan paperwork is that the attempts to negotiate them away fall on deaf ears. Negotiations are particularly tricky if you wait until closing to bring your concerns to the table. The best way to handle unnecessary expenses is by comparison shopping with good faith estimates. Even if you chose to go with a lender that has some suspicious fees, you are in a better position to negotiate if you can state that other lenders in the area have lower closing costs, and if you initiate negotiations early in the loan approval process. By the time you make it to closing, lenders know that most home buyers would be unwilling to walk, leaving you with little room for negotiation.