By Holden Lewis
bankrate.com
When you compare mortgage offers, you have to know which fees to pay attention to and which costs to ignore until later.
It's worth taking the time to contrast loan offers. A Bankrate.com survey of online mortgage lenders finds that their estimated fees vary widely. Some lenders are more thorough than others when they estimate the fees and taxes involved in a transaction, making it confusing to comparison-shop.
There are five kinds of closing costs:
- Fees that the broker or lender charge
- Fees that third parties control
- Taxes
- Title insurance
- Prepaid items.
When you compare brokers and lenders, the first two types of costs are the ones to pay attention to. Fortunately, those are the costs that lenders will most likely estimate correctly.
On the other items -- taxes, title insurance and prepaid items -- the online lenders in Bankrate's survey are inconsistent, often incomplete and frequently inaccurate.
You can't blame the lenders, really. Estimating closing costs nationwide, based on information that customers provide online, is like driving a 1979 AMC Pacer across the country: Breakdowns are inevitable. This is especially true with taxes, which vary by location, and title insurance, where local custom governs who pays for what.
Borrowers first should scrutinize each lender's cost estimate and add up fees the lender directly controls, plus third-party fees associated with getting the loan.
Lenders are aware that this isn't easy. Even if you get multiple quotes and compare them, "it's still very difficult to go through and say, 'What am I really paying? What do I have to pay and what do I not have to pay?' " says Rob Snow, vice president of retail lending for E-Trade.
When you apply for a mortgage, the lender is required to give you a standard form called the good faith estimate of closing costs, the operative word being "estimate." What an online lender presents to you onscreen isn't officially a good faith estimate, but it should be close, and the information presented there is what Bankrate.com compiled in the fee survey.
"What you see on the screen is in a sense a summary of the costs, but not in the detailed format of a good faith estimate," Snow says. "I hope it wouldn't change at all in terms of the bottom-line number."
It's a similar story at rival Amerisave, where Dave Herpers, director of consumer affairs, says the technology that the lender deploys to display detailed closing costs online is identical to that used to prepare good faith estimates.
"Assuming that nothing changes from what you searched on the Web site to your application, the fees would be identical," Herpers says.
The good faith estimate is divided into sections of similar fees, each denoted by a range of numbers: the 800s, 900s, 1000s, 1100s, 1200s and 1300s. For comparison-shopping, the most important fees are the ones listed in the 800s. Most of these items are controlled by the lender or broker, so the estimates should be accurate. A few of the items in the 800 series are charged by third parties and the lender shouldn't be far off in those estimates.
The lender or broker has direct control over origination and discount points and fees (801 and 802) and administrative, underwriting, processing, funding, document prep, wire transfer and other fees (810 and higher).
Third-party fees in the 800s include the appraisal, credit report, inspection, mortgage insurance application, assumption, tax service and flood certification. These fees are supposed to be passed along to you without markup. Some national mortgage lenders own subsidiaries that perform these functions, so they have a good handle on what the costs will be. You should expect smaller lenders and brokers to estimate these fees fairly accurately, even though they don't own subsidiaries that offer the services.
Fees in the 1300 series -- for surveys and pest inspections -- should be easy for lenders to estimate accurately, too.
The 900s and 1000s cover prepaid items -- mortgage; hazard and flood insurance premiums; mortgage interest; and taxes that must be paid up front or deposited in an escrow account. The 1100s comprise title charges: title insurance premiums, settlement or escrow fees, attorney and notary fees.
Items in the 1200 series consist of government charges such as city and county tax stamps and recording fees. Online lenders hardly ever get taxes and title insurance right. Although lenders' estimates of prepaid items, taxes and title insurance vary wildly, the actual costs come closing day won't differ much, no matter which lender you pick.
So you should ignore title insurance and taxes when you compare offers, right? "It's a reasonably fair assessment," Snow says. In most states "there's a little more variability in the title insurance than in the taxes," he says. Since the real estate agents (not the bankers) usually select the settlement agent and title insurer, you have to lean on the agents to make sure you don't overpay for title insurance.
"If you're comparing lenders, I wouldn't take title and attorney fees into account at all," says Jeff Becker, director of operations for E-Loan. He recommends that you ask the attorney or settlement agent for advice on timing the closing to hold down the cost of prepaid items.
