Lower Closing Costs
Lower closing costs aren’t the result of merely going to the right broker or lender for your mortgage. There’s more to it than that. And there is one step you should take to help you pay a fair price for the work your lender or broker does to close your loan.
This step is to get a good faith estimate. Lenders and brokers are required by law to provide customers with a good faith estimate. And most do. But you want to make sure that you ask for it so that you let your lender or broker know that you will hold them accountable to the document.
Your good faith estimate shows a break down of all of your closing fees and impounds. Closing fees are one-time, non-recurring costs associated with closing your loan. These can include title fees, underwriting fees that go to the lender, origination fees that go to your lender or broker, and appraisal fees among others. Impounds are those recurring costs associated with home ownership. In most cases you will allow your lender to impound or pre-collect fees every month that they will put into an escrow account. They will also impound fees at the time of closing. The lender will use those fees to pay your homeowner’s insurance and your property taxes. Since the lender is collecting the fees and paying them directly, they can be assured that your taxes are paid instead of trusting a borrower to pay them. At the end of the year, they will assess your escrow account and either send you a refund check for fees they didn’t end up using, or they will send you a bill for the fees they paid that your account didn’t cover. If you choose to have your lender impound, then both recurring and non-recurring costs will be line-itemed on a Good Faith Estimate (GFE).
What is particularly useful about a GFE is that the federal government has created the form so that it is uniform across lenders. So a borrower looking at a GFE in Massachusetts will have the same form as a borrower looking at a GFE in California. Of course, the numbers may be different, but each of the various types of costs will be listed in the same place. This means that you can take your original GFE with you while you are shopping your loan. Any broker you go to will try very hard to beat a GFE that a potential customer brings in. And if they are unable or unwilling to beat the fees charged on your original GFE, then they can perhaps offer you a shorter pre-payment penalty or a similar incentive.
But when you are shopping your loan, you want to make sure that you are comparing apples to apples. That means you have to make sure that each broker or lender is quoting you the costs for the same loan. For example, if one broker charges $5,000 flat for a 30 year fixed loan and a second broker charges you only $4,000 you want to make sure they too are offering a 30 year fixed and not a 2 year adjustable rate mortgage, for example. You will also want to make sure that each are quoting you their fees for the same loan amount. This is particularly important because fees are often determined as a percentage of your loan amount.
A GFE is also useful because it gives you a fee quote that you can take with you to closing. When you sign your loan documents, you will sign a HUD1. This is your final delineation of closing costs. A title or escrow officer will prepare this document and have you sign it. What is nice is that this final document has the exact same line item numbers as your original Good Faith Estimate. So your appraisal fee will be shown on the same line number on both documents. This makes it easy to compare your final costs with your original quote.
Keep in mind though, your original GFE is an estimate. So if you close at the end of the month instead of the beginning of the month, your fees can be different. Usually you will notice the difference in your recurring closing costs like insurance and taxes and in your pre-paid interest.
In order to avoid surprises, it is a good idea to ask for another GFE right before you close. Typically, you should request it three business days before you sign. This allows the broker time to prepare the document, have an accurate knowledge of what the final costs will be, and also time for you to resolve any concerns that might arise after you review this GFE. A good broker should be able to create a GFE that is within pennies of your actual final costs. Most importantly, don’t be afraid to ask questions. You can ask your loan officer, his or her manager, and whomever guides you through the signing process. When you make an effort to really understand the process, you’ll always pay lower closing costs.
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