The following is a guest post by Kyle Chezum, a content specialist at Lender411.com. Lender411.com helps homebuyers compare mortgage rates, find local lenders, and locate the best mortgage packages available.
If you’re taking out a mortgage, you’ll pay closing costs on the loan. We all know this and expect it. Your lender has probably already provided you with a list of what closing costs you’ll have to pay and their respective amounts.
But you don’t have to pay every fee on the list. For starters, some are negotiable by nature, which means the lender fully expects you to haggle. You’re giving away money if you don’t. Second, some fees aren’t required at all. They’re phantom fees that literally pay for nothing—and if you keep your mouth shut like a good little borrower, your lender will simply take the money as profit. Don’t let this happen.
Protest. Start a revolution. Check everything twice and ask your lender for clarification. The list below will help you determine which charges are legitimate and which ones aren’t, and if your lender tries to charge you a fee that isn’t listed here, be very suspicious.
- Origination Fee: This is a legitimate fee, but it’s simply profit for the lender. This is the fee they charge you for the service of creating the loan. As a result, you can definitely negotiate. No lender wants to lose your loan over something as simple as this, and they’ll often work with you to reduce it.
- Application Fee: Try to get out of this. Lenders try to argue that the application fee pays for other parts of the loan process, such as the credit report fee or the appraisal fee, but the money rarely gets used this way. Avoid an application fee if you can, but lenders are fierce on this one—it’s guaranteed money for them. Do your best.
- Payment Points: Legitimate—but optional. It’s up to you whether you want points as part of your mortgage package. Points are typically paid by the borrower in order to reduce the loan interest rate.
- Credit Report Fee: This actually does cost your lender money, but they’ll almost always charge you more for it than it costs them. Negotiate this one too.
- Appraisal Fee: A legitimate fee, but you might have already paid for it yourself. Did you pay to have the house appraised at the time of the appraisal? Yes? You wouldn’t believe how many lenders will tack on a fee to cover this when in fact the borrower already paid for it. Check this.
- Assumption Fee: This one is unfair at best and unnecessary at worst. An assumption fee is the fee you pay when you are assuming the mortgage of a previous borrower. This shouldn’t cost your lender anything, and therefore you shouldn’t pay for it.
- Mortgage Broker Fee: This is a real one. Don’t try to squeeze out of this. Your mortgage broker has performed a valuable service for you deserves to be paid.
- Lender Inspection Fee: Completely fake. Protest!
- Tax Servicing Fee: A small fee, but nonnegotiable. Just like with the credit report, though, your lender may try to overcharge you for it. Ask questions. Find out what the true cost of the service was.
- Document Preparation Fee: The most bogus of all bogus fees. If your lender won’t scratch it out, at least demand to know what it was for. Document preparation? Has anyone ever figured this one out? We think not. In some cases, however, this covers the cost of hiring an attorney to review the loan paperwork. But this is often unnecessary. Find out before you pay.
- Rate Lock-In Fee: This is usually a real cost, because it secures you a specified rate for a certain period of time regardless of market conditions, but you can probably negotiate it.
- Underwriting Fee: This one is a real expense and typically nonnegotiable.
- Processing Fee: Another real expense. If you make a fuss, you might be able to negotiate this one, since it simply covers the “office overhead” required to originate the loan. But it’s probably not worth it, as many of these costs are pretty standard for your lender.
- Escrow Fee: The big one. You can almost always save at least a few hundred dollars on this expense. Lenders often work with specific title companies and they’ll try to push you into the one they’ve got a partnership with. Don’t agree. You don’t have to. Do some research and find a cheaper title company. Their will almost always be a cheaper one. Make your lender play in your court.
Different lenders are going to react differently when you approach them to reduce your closing costs. Some may oblige willingly. Others, not so much. A few won’t budge at all, though this is rare. Play it by ear. Study the list above and do what you can to save a few hundred dollars—or even a few thousand—when your mortgage closes.