Shopping for Closing Costs - Part 1

As I read the national print media, I see that there is a lot more attention being paid to closing costs. Almost invariably closing costs are viewed as negative and, while they open the door for abuse, I think that a lot of the worry is misdirected.

First of all, let's look at the magnitude of the issue. In most transactions, the extraneous closing costs are on the order of $2,000 and half are charges by the settlement agent or attorney and title insurance. Those are pretty much non-negotiable. The other half, various lender fees, are what get people excited. I don't think it's worth all the ranting and raving. Here's why.

The interest cost for ten years on a maximum Conforming loan of $359,650 is about $200,000. Compare that with $1,000 in lender junk fees! You spend 200 times as much on interest as on junk fees. That's why you should concentrate on finding a lender that offers a better interest rate. A rate that is only .125% lower saves you over $4,000 over that same period of time. Which is more important?

Remember that from the standpoint of many lenders, shopping is a shell game, you know, the kind where you are supposed to guess which shell the pea is hidden under. They are definitely trying to fool people, those who "shop" for a lender based upon closing costs. They will not even tell you about fees that they fully intend to add later. So what's the point of going through that kind of a shopping process? And don't expect the regulators to come to your assistance.

All that said, there are what I will call "reasonable" fees and then there are "unreasonable" ones. Everyone pays for an appraisal and a credit report and no one seems to complain about those fees. Perhaps it is because they can see something tangible that they paid for. This is not the case with some other fees, which are a little illusory. Let's talk about some of those.

Processing fee - This is the cost of assembling the required documentation from the borrowers, from the agents, title insurance companies, settlement agents, and appraisers, submitting the 3/4 inch thick file to underwriting. The processor also coordinates the drawing and signing of loan docs, and funding the loan. In many offices the processing staff is paid the fee collected from the borrower rather than a salary. Let's say for a moment that my company could not legally charge the borrowers $400 for processing any more, that the processors had to be paid salaries. Fine, then I'll just add, say .125 or .25 points to my fees and pay the staff out of that. Which is the better way?

Underwriting - This is the cost of making sure that you and your property are qualified for this loan. These days, much of that is responsibility is taken over by computerized underwriting systems such as Desktop Underwriter. FannieMae charges only $40 for underwriting, but someone at the lender has to verify everything, a process that takes a couple of hours. Is an additional $250 reasonable for that?

Documents - There are typically about 75 pages of documents. All lenders have computer programs that add names and addresses into boilerplate the specific document sets. If it is done by an outside service, the raw cost is about $50, but someone has to enter the data, print them out, check them for accuracy, and pay for FedExing them to the settlement agent. The typical charge for this is about $250.

Now I think that charging for these services which are directly attributable to each loan is reasonable, just like charging YOU for YOUR appraisal is reasonable. The other alternative is to assume that they are just overhead costs and add enough to the fee structure to make sure they get covered. The way things work with overhead, of course, is that you’d likely end up paying more, it just wouldn’t be identifiable.

We'll talk about the unreasonable closing costs next week, but in the meantime, remember that the important thing is to work with a loan representative who is on YOUR side, one who is committed to helping you reduce your total interest expense, not just the initial cost.