How much should your mortgage cost?
According to consumers, the answer is that it should cost less than it does. Once you add in loan fees, discount points, origination points, and other closing costs and fees, you can wind up shelling out a whole lot of cash to get the mortgage you need to buy your home.
According to BankRate latest closing cost survey, the average cost for origination fees, as well as title and closing fees comes to $3,000 for a $200,000 loan.
“The origination fee was an average of $1,627 on a $200,000 loan” explains Greg McBride, senior financial analyst for BankRate.com
And origination fee is one thing. But according to Keith Gumbinger, Vice President of HSH Mortgage, the Pompton Plains, NJ-based publisher of mortgage information, total out-of-pocket loan fees can run as high as 3 percent of the loan amount, or $6,000 on that $200,000 mortgage.
Worse, lenders are apt to call their fee charges by different names, which is confusing to borrowers who are trying to compare loan costs on an apples-to-apples basis.
In its closing cost survey, BankRate looked at each state’s average closing costs and compared it to a national average.
In Georgia, for example, The BankRate survey found the average document preparation fee was $321. In New York, the same fee is an average of $298, while in California it is $248.
Expenses vary in each state, with some being higher or lower than the national average. Overall, Georgia’s average closing costs were $3,046 on a $200,000 loan, while California’s average closing costs were $3,097, while New York’s total average closing costs were $3,887. (The entire closing cost survey, complete with a state-by-state breakdown can be found at BankRate.com.)
“Some mortgage lenders itemize their fee and break it into two or three different things, like a ‘doc prep’ fee or an application fee. Another lender may lump everything together under the term ‘lender fee’ or ‘processing fee,'” explained McBride.
Of course, not every lender charges for every fee. McBride said that buyers could face dozens of potential closing costs charges.
“That’s why you have to sit down and get good faith estimates from 3 lenders and put them side-by-side.”
Gumbinger says that’s not nearly enough and suggests borrowers should shop their mortgages requirements to as many as a dozen different types of lenders, including national lenders, Internet lenders, local credit unions, local banks or savings and loans, and finally, a top-rated mortgage broker.
“You want to talk to a dozen places for pricing purposes to develop a sense of what is normal for you,” he explained. The key thing to look for is how much cash the lender is asking for to complete the closing.
Gumbinger suggests buyers start their search for a lender by developing their own premise for a loan.
“For example, let’s say you don’t want to pay any points upfront, you’re putting 20 percent down and you’re looking for a 30-year fixed rate mortgage,” he offers. “Next, start talking to lenders or look online. Tell lenders you’re a good credit quality borrower. Then, start asking about closing costs.”
Although lenders are required to give borrowers a good faith estimate (GFE) of closing costs, consumers continue to complain that many GFEs aren’t worth the paper they’re printed on. Prices quoted can differ significantly from the actual closing costs, often putting borrowers in a bind when they show up at closing.
In 2004, the Department of Housing and Urban Development began studying proposals that would change the requirements of the Real Estate Settlement Procedures Act (RESPA). One of the proposals would have required the good faith estimate to be delivered at the time of application and be more specific about the fees and breakout for broker compensation.
The proposal would have come with “teeth,” Gumbinger said. “The fees at closing would have to be no more than 10 to 15 percent higher than those in the good faith estimate.”
Gumbinger said HSH polled consumers in 2004 and more than 63 percent said they wanted a more accurate good faith estimate. It’s not that consumers really mind paying the higher fees, Gumbinger suggests. Call it the unpleasant shock factor.
“Collectively, the industry has done a very bad job of explaining the legitimate fees and charges for making a loan,” Gumbinger said. “If lenders did a better job of showing consumers what the legitimate fees and charges are, and more importantly, why they’re getting paid for them, they wouldn’t have problems (with consumers) at closing.”
“For some lenders, fee padding goes back to the beginning of time,” Gumbinger added.
How can you avoid being overcharged?
“Do your research and don’t sign up with the first guy that says “I have a loan for you” Gumbinger warned. “You have a responsibility to find out in the marketplace what’s available to you for your credit history and loan profile. Once you have a sense of that, you can start to find out how much your loan will cost.”
By shopping around, you can then determine what your loan should cost. Let the negotiations begin.
See part one of this article, What Mortgages Cost Ã¢â‚¬â€œ or Should Cost, PART I of II for more information.