Closing cost guarantees can still mean financial surprises

Published 9:00 pm Saturday, June 5, 2004

NEW YORK – Vinny Worley was hit with an unexpected $1,800 transfer tax the day he was scheduled to close the deal on his new house in 2000.

“Fortunately I had the funds, but if I hadn’t, we wouldn’t have been able to close that thing,” said the Newark, Del., engineer.

So when Worley decided to refinance the same house a few years later, he was intrigued by a deal that promised to guarantee his closing costs. In other words, the price quoted for services such as the title and appraisal wouldn’t change at the time of the closing. If unexpected costs arise – such as the $1,800 transfer tax – they would come out of the mortgage broker’s pocket, not his.

Today, deals that guarantee closing costs on mortgage purchases and refinancings are common. They have been around since at least 2001, but have accelerated in the last year after a proposal was introduced by the Department of Housing and Urban Development to legislate flat-rate closing costs.

For the most part, the guaranteed programs seem to be welcome relief to those who want to avoid the hassle of last-minute financial surprises. But these deals can have downsides, such as higher loan rates and less flexibility.

“Consumers drawn in by this still need to be aware that there will be fine print, and they need to read the fine print,” said Keith Gumbinger, spokesman for HSH Associates, a publisher of mortgage information. One of the biggest problems is that the programs can vary in what they guarantee and how, which “just adds to the confusion” around closing costs, Gumbinger said.

Closing costs have become a point of contention in recent years because the traditional method of using a good-faith estimate can lead to last-minute fees that, if not paid, can jeopardize a deal. These charges have been known to be junk fees added by unscrupulous lenders and brokers, but they can also be the result of sloppiness.

A recent survey by Bankrate.com found that good-faith estimates contain a lot of gaps and inconsistencies. Roughly 17 percent of lenders and brokers, for example, were missing estimates for the appraisal and the title insurance.

Guaranteed closing-cost programs can fix those problems, but you have to shop carefully. Right now, shopping can pay off because lenders are aggressively touting their programs with deals and financial incentives.

Amerisave Mortgage Corp., which launched a guaranteed closing-cost option in March, gives $300 to consumers who can find a better deal elsewhere, backed by a good-faith estimate.

E-Trade Financial Corp.’s mortgage arm promises $500 at closing if it can’t beat a competitor’s mortgage rate and closing fees, even if you close with another company.

Before you choose a lender, know what you are getting into. Make sure that any guarantee includes what are known as third-party settlement fees. Some lenders who say they guarantee closing costs are referring to their own fees, known as lender fees, not third-party costs, such as the title work and the appraisal.

Generally, the only costs lenders can’t legitimately secure are what are known as prepaids. These include the first year’s homeowners’ insurance premium, any money owed to the seller for real-estate taxes already paid, and funds required to set up an escrow account.