Borrows have some weapons for keeping closing costs down, the result of recent guidelines requiring lenders to disclose certain fees, but perhaps the most underutilized consumer tool simply involves old-fashioned haggling.
Good-faith estimate rules, part of a tougher Truth in Lending Act that emerged from the mortgage crisis, mean that lenders must provide a clear picture of the costs involved in buying or refinancing a home. Yet consumers may not realize that some of those numbers are actually negotiable, mortgage experts say.
“There’s a lot of room for negotiation in the costs of closing,” said Barry Zigas, the director of housing policy at the Consumer Federation of America, a consumer advocacy group, “and consumers should examine every charge and not hesitate to challenge them and try to bring them down.”
Closing costs can run a borrower 3 to 6 percent of the price of a property, according to the Federal Reserve. In 2010, the average cost for a $200,000 purchase rose by nearly 37 percent, to $3,741, according to Bankrate.com, a financial data publisher; the average in New York State was $5,623.
Most borrowers pay less attention to closing costs, focusing instead on the interest rate offered by a lender. But because many of the fees associated with closing are not set in stone, mortgage experts say, consumers should review the line-by-line estimates with a view toward challenging them. Lenders are required to outline all the estimated closing costs within three days of receiving a loan application.
The standard good-faith-estimate form used by lenders makes it easier to compare the terms offered by lenders, and it lists the services a borrower can shop around for, versus those selected by the lender.
John T. Mechem, the vice president for public affairs of the Mortgage Bankers Association, said borrowers should “simply ask the lender which fees are negotiable and which are fixed.”
“Sometimes a borrower can shop for individual services and find a cheaper alternative to the provider that the lender uses,” Mr. Mechem said.
Mr. Zigas agreed. “Ask, ‘Who is getting paid this fee, and why am I being asked to pay it?’ ” he said.
The good-faith-estimate rules say that certain charges cannot increase at closing, including those for loan origination and points paid to the lender to reduce a locked interest rate, with 1 point equal to 1 percent of the loan amount. But borrowers can negotiate those charges.
Some other charges can rise up to 10 percent, including title services and appraisals, regardless of whether the borrower chooses providers listed by the lender or shops around. In general, charges for any required services that the lender selects or that the borrower shops around for, using companies selected by the lender, can rise 10 percent.
For a $200,000 home with a 5 percent down payment, the settlement costs of that $190,000 loan, not including reserves for property taxes and down payment, typically range from $6,235 to $19,930, according to the Federal Reserve. The loan origination fee can range from $2,130 to $3,105; the application fee, typically from $65 to $640; and points can add $5,700.
While regulators discourage lenders from overestimating costs, they don’t penalize them for doing so.
Therefore, borrowers should understand that “it’s not a time to be polite,” said Kathleen Day, a spokeswoman for the Center for Responsible Lending, an advocacy group. “You have to have a strong stomach and a stiff spine and not bow to pressure from the other side of the table to close the deal,” she said, even in this tight credit environment.
For a refinancing of your primary residence, you can generally cancel your mortgage application for up to three days after closing, with fees refunded.