Hordes of homeowners are walking away from mortgages they can no longer afford, making it clear that plenty of people closed on loans they didn't understand. It's bad enough that lenders' laundry lists of fees make comparison-shopping a challenge. Insult is added to injury amid the blizzard of paperwork at settlement, when borrowers often find that they must fork over hundreds or even thousands of dollars more than originally estimated. And they may wake up later to an adjusting rate they didn't expect or to a prepayment penalty that limits their ability to refinance or even sell the home.
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In the wake of the mortgage mess, the U.S. Department of Housing and Urban Development has resurrected a proposal to reform the rules that govern real estate closings. It's not the first time that HUD has tried to give the Real Estate Settlement Procedures Act more teeth. A push two years ago (before the housing bust) was shelved after the business community objected strenuously to the reforms, which would have simplified closing charges and required that mortgage brokers reveal their commission.
This time around, HUD wants to improve the document that starts the ball rolling: the Good Faith Estimate. The GFE is what the lender gives you when you're shopping for a loan. The reborn GFE would clearly disclose a loan's terms and total estimated closing costs so you could more easily compare loan offers. And its presentation of closing costs would mimic the settlement statement (the HUD-1 form), the final accounting of loan terms and costs that you receive at closing. Lenders would have to stick to their own estimated fees at the settlement table and limit an increase in the total of certain third-party fees to no more than 10%. HUD estimates that armed with the tools to shop for a loan more effectively, the average consumer would save nearly $700.
HUD spokesman Brian Sullivan says that the agency is "incredibly hopeful" that the regulation will be enacted before President Bush leaves office next January. In the meantime, there are ways you can reduce the frustration and costs at closing.
What you'll pay. Closing costs vary depending on where you live -- from 2% or 3% of a home's purchase price up to 5% or 6% in high-tax areas. Bankrate.com's 2007 survey of closing costs found that on a $200,000 mortgage with a down payment of at least 20%, the U.S. average was $2,736 -- not including taxes, government fees (such as for recording documents) and funds you prepay or put into escrow.
The cost of the so-called origination fee averaged $1,294, while the average for title insurance and other costs was $1,442. New York State had the highest costs, at $3,830, followed by Texas, Florida, Pennsylvania, Ohio and Hawaii. Indiana's were lowest, at $2,339. (See Bankrate's breakdowns of closing costs by state.)
Side-by-side comparisons can be difficult because GFE forms aren't standardized. Ask your real estate agent to review the estimates with you. Baltimore Long & Foster agent David Martz offers that service. "I see a lot of loan numbers come across my desk, so it stands out if something isn't correct," he says. Agents say that out-of-state and Internet lenders often misquote local fees and taxes.
Look carefully at third-party fees for lender-required services (these typically include a property appraisal and survey, a termite inspection and a flood-hazard-determination fee), as well as fees for administration of escrow or settlement. Austin, Tex., mortgage broker David Reed, author of Mortgage Confidential, says that in any region such charges should be similar. It's also illegal for lenders to mark them up. However, disreputable loan officers may lowball them to make their offer look more attractive.
How to save. Besides any discount points (prepaid interest) you pay upfront to lower your interest rate, you'll pay a loan-origination fee of about 1% to 1.5% of the mortgage amount to cover the lender's work in evaluating your application and preparing your loan. Lenders usually include a variety of other charges (commonly called "junk fees") for everything from underwriting, administration, processing and document preparation to attorney and notary fees.
You'll probably pull your hair out trying to compare the fees line by line, apple to apple, because lenders' fees go by different names. It's easier to simply add up total lender fees (excluding third-party charges and escrowed amounts for taxes and insurance), compare the totals and use your findings to negotiate lower fees.
Title insurance. You must purchase a title-insurance policy for the lender to protect its interest from claims against the property, and you may want one for yourself, too. In some regions, sellers customarily purchase the owner's policy. If you're refinancing, you'll have to pay for a new lender's policy, but your existing owner's policy will cover you.
Robert Hunter, director of insurance at the Consumer Federation of America, says that he doesn't buy owner's coverage because the chance an unexpected problem will arise is small, and the likelihood the policy will exclude it even if it does is great. But some home-owners are afraid to do without the coverage.
Insurers market title insurance to intermediaries, such as your real estate agent or settlement agent, who are paid a commission from the premium. They may then steer you to the insurer with which they're affiliated (such relationships must be disclosed).
Title insurance is uniformly expensive, says Hunter, because you pay the premium for the lender, and the lender has no reason to lobby for lower premiums. States set caps on title-insurance premiums but differ in their definition of what those premiums include; fees for services such as the title search and administration of settlement may or may not be folded in. Bankrate's survey showed that the average cost of title insurance and title work (on a $200,000 house) ranged from a low of $590 in Oregon to a high of $1,538 in New York.
Comparison-shopping could trim several hundred dollars from your premium. For example, consumers in California can use a tool called Title Wizard to search for the best deal.
If you want to compare premiums on title insurance, call insurers or title agents before you begin to shop for a mortgage. That will allow you to fill in the blank with your choice of title insurer. If you wait, the lender will already have designated a title insurer when you get the GFE, and the title search will have begun. (To find title insurers, visit www.alta.org and click on "consumer information" and "finding a local title company.")
When you receive a rate quote, ask the title agent what it includes and whether you're eligible for any reductions. Discounts for bundled services or closing-package deals (which might include escrow or settlement services, home-warranty insurance, or flood or hazard insurance with title insurance) could trim your bill by a third. You could also qualify for a bulk rate available to homeowners who have bought in a new sub-division. And discounts may be available for first-time buyers or senior citizens. If it's been a decade or less since you bought your home or last refinanced it, ask about a cheaper, "reissue" rate.
Tell your real estate agent, the lender and closing agent that you want to see the HUD-1 form at least 24 hours before closing. Compare it with your Good Faith Estimate to identify any discrepancies. If the proposed rule changes pass, the closing agent will have to provide the HUD-1 form three days prior to closing.
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