Question: I looked into three separate lenders to try to get a refinance and I got three different sets of figures, with very different costs for appraisals, loan fees and even courthouse fees. I would think that at least the courthouse fees would be the same. How should I evaluate these three lenders when I make my decision?
M.D., Everett
Answer: First of all, congratulations for getting written good faith estimates from different lenders before you make your decision. Some borrowers simply get quotes over the phone when shopping for a mortgage. But interest rates and points tell only part of the story. Administrative fees can add hundreds of dollars to your total closing costs. When comparison-shopping, be sure to get a full cost breakdown in writing so that you can see the total picture.
Another reason to get estimates in writing is that it may help you avoid the bait-and- switch artists. Some unscrupulous loan officers will quote very low interest rates over the phone and pressure you to complete a loan application while glossing over the full costs of the loan program they are offering. If you ask for a written quote first, that may be the last you hear from them.
Once you get written rate quotes and closing cost estimates from the lenders, you can compare the bottom line cost of each lender – assuming they reveal all of their costs on the good faith estimate. Some mortgage brokers only give you their closing costs. They do not include costs charged by the ultimate lender such as underwriting fees and document preparation fees. These fees can add hundreds of dollars to your total closing costs. Be sure to ask if there will be any other costs paid at closing that are not disclosed on the written estimate.
A key point to remember is that a good faith estimate is just that – an “estimate.” It is NOT a guarantee. The accuracy of the estimate is only as good as the “good faith” of the person making the estimate. Therefore, I think it is wise to ask the loan officer if they are willing to GUARANTEE that your final closing costs will not exceed the costs quoted on the good faith estimate. You might even ask them to give you a guarantee in writing. That may prevent unpleasant “surprises” at closing.
A few years ago I saw the results of a consumer survey in which 40 percent of the homebuyers said they found fees on their final closing papers that had not been disclosed to them ahead of time.
By the time you get to the closing table in a purchase transaction, you don’t have time to find another lender. Unscrupulous lenders take advantage of that fact and their customers are forced to choose between paying the excess loan fees or losing their dream home.
The real heart of your question is, “Why do closing costs vary so much from lender to lender?” There are several reasons for this. Mortgage brokers work through “wholesale lenders” who actually provide the money for the loans. Each lender sets its own administration and underwriting fees to cover their overhead expenses. These fees are typically passed on to the borrower, and they range from $450 to $700, depending on which lender the mortgage broker is using. So that accounts for some of the variation in closing cost estimates.
Another reason for the variety of closing cost estimates is that each mortgage company has different overhead costs and profit expectations. Some mortgage brokers are happy making a gross profit of only one point (one percent of the loan amount), while others try to make a profit of two or three points on each loan.
Some loan officers deliberately provide a low cost estimate to make their loan appear to be a better deal than their competition. For example, the courthouse fees for recording the documents will be exactly the same no matter where you go, so if one mortgage company shows recording fees significantly lower than the others, they are either deliberately on ignorantly under-estimating that cost.
On the other hand, some mortgage companies pad their profit margin by inflating the cost of some third-party services. For example, appraisal fees are fairly standard. A typical single-family residential appraisal costs $400 to $450. So if you are being charged $600 for an appraisal on your home, the lender is probably adding a profit margin to that fee.
Be an informed mortgage consumer. The more you shop, the more you’ll learn. This is a very competitive mortgage market. Once you weed out the overpriced companies and the underpriced bait-and-switch artists, you will find that most of the legitimate mortgage companies offer pretty close to the same interest rates and fees on any given day, with only slight variations from company to company. In then becomes a matter of selecting the loan officer and mortgage company with whom you feel most comfortable.
Mail questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206. Fax questions to Tytler at 425-339-3435 or e-mail him at economy@heraldnet.com.
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