Avoid Over Paying Mortgage Junk Fees

Additional fees for obtaining a home mortgage that serve no useful purpose are called junk fees.  Most fees associated with originating your loan are third party fees necessary to obtain a loan approval, examples are appraisal fee, credit report fee and flood certification fee.  Fees that are not necessary and are paid directly to the originating mortgage company are junk fees.  Most junk fees do have one main purpose – increase the profits of the firm arranging the loan in addition to the money that make on the mortgage rate.

In order to ascertain which fees are junk and potentially profiting the originator at your expense, you have to compare the costs of the loan.  One of the biggest obstacles in obtaining the least expensive loan is being able to accurately compare loan quotes.  A mortgage rate quote by itself is of little value.  You need the interest rate, term, costs and loan program.  Clearly there is no point in comparing the rate and cost of an adjustable rate loan to a fixed rate loan with different terms.  Before you attack the junk fees and question the loan officer, evaluate the different loan products and then get a mortgage rate quote with a complete break down of costs.

When you’re going through the process of applying for the loan, you will be given a variety of documents.  Mandatory disclosure documents that are given out with every mortgage application make the evaluation exercise much simpler.  One such document is the Good Faith Estimate that covers all the costs associated with obtaining the home loan.  Federal law requires all mortgage lending institutions to provide a good faith estimate of closing costs within 3 days of the borrower filling out an application.  With the Good Faith Estimate you should also receive a truth in lending notice.  This is another federally mandated disclosure that spells out the mortgage interest rate over the life of the loan.  These two disclosure documents, combined, are the key to evaluating the home loan fees and costs.

On the Good Faith Estimate form the costs of the loan will be itemized by category.  Some lenders will charge more than others in various categories.  The category of the fee is often not as important as the total amount of the fees.  As an example, if lender A charges a $400.00 processing fee and lender B does not, lender A is not necessarily the better deal if lender A charges a $1000.00 origination fee and lender B charges no origination fee.  Compare total costs and groups of costs as opposed to focusing on any particular fee that jumps out as being a junk fee.

The first group of fees on a Good Faith Estimate is the fees to cover the lender or originating mortgage lender for their services.  This group is the category of fees with the greatest amount of room for negotiation.  Here you find the charges for origination fee, discount points, appraisal fee, credit report fee, processing fee, document preparation fee, underwriting fee and perhaps other related charges.  Junk fees are almost always thrown into this group.  The key is compare similar loans with more than one mortgage lender.  The total fees are more important than how any lender breaks them apart.

The second group is the prepaid charges.  There is really no room to overcharge here, so negotiating should be irrelevant.  On a purchase, the homeowners insurance may go here and the interim interest for the time you have the loan until the start of the first payment cycle would be disclosed here.

The third group is reserve or escrow deposits.  These deposits are dictated by the taxing authorities and the time of the closing.  Escrow are fairly well regulated, it would be difficult to find abuse in this section.

The fourth section is the title and closing charges.  It is not often you will find a mortgage company that will negotiate the title charges.  The primary reason being that the title company or closing company is not related to the mortgage company in most cases.  If the title company is related, negotiate this fee as low as possible.  Even if they are unrelated, it never hurts to complain about the amount of the charges for title insurance and closing fees.

Even though negotiating and asking questions about the closing costs can be time-consuming, you may be able to save hundreds, or even thousands of dollars at closing.  Get another rate quote if necessary from a competing mortgage company.  Compare the figures.  Ask if the fees can be reduced.  Don’t be intimidated; there are an abundance of mortgage companies looking for your business.  If the loan officer won’t help you, move on and find one that will.  Asking for the best mortgage rate and best terms at the lowest cost is your right. 

When you get to the closing make sure the fees that were explained to you at the time of the application and placed in writing on the good faith estimate are equivalent.  The purpose of the good faith document is to let you know what loan fees that you may be paying at closing.  At the closing you will receive a HUD-1 settlement statement to review and sign, be sure the fees on this document are the same as the fees in the good faith estimate.  If you want to question any of the fees on the HUD-1 settlement statement, do it without delay.  You may feel as if you shouldn’t question these fees, but you have a right to do so and you should understand all aspects of this process with its cost.

Shop wise.  Don’t accept the first offer that comes your way.  Closing costs are necessary evils of closing a mortgage for either a home purchase or refinance.  However, at times, they are used to increase the income of the mortgage originator or lender in a deceptive manner.  It’s the job of a good loan officer to explain all of the costs to you and expect that you may shop around.  A good loan officer who does his or her job right should expect that of educated borrower and accept the competition.  Any amount of money that you can save at closing will be worth it.