The process of securing a home loan can be confusing and daunting, especially when it comes to the laundry list of fees associated with your mortgage. It can be very difficult to understand all the fees and closing costs and whether or not you're being overcharged.
Shopping around for the lowest closing costs could save you thousands -- money that could be spent on your new home instead of on your loan. Here are 5 strategies to help you shop for the lowest closing costs in order to avoid sticker shock at the closing table.
5 ways to save
No. 1: Shop around.Getting quotes from several mortgage lenders is the number one piece of advice when it comes to mortgage shopping. Although lenders don't have to provide an estimate before you apply for the loan, you should be able to find lenders who are willing to provide some ballpark figures. Try to get at least three estimates from local lenders. Speaking to local lenders is extremely important, especially when it comes to closing costs.
No. 2: Know your locale. Location is very important when it comes understanding the closing costs associated with your loan. According to the Federal Reserve, a general rule of thumb is to expect closing costs to be roughly 3 percent of your home's price. However, in certain high-tax areas of the country, closing costs can be closer to 5 or 6 percent of the home price.
No. 3: Don't pay for a lower rate. Homebuyers have the option to pay more points at closing in exchange for a lower interest rate. However, experts say paying points isn't really worth it when mortgage rates are already low. "I would suggest not buying down an interest rate," says Mark Hanley, a mortgage officer in Austin, Texas. "Paying upfront discount points in today's market seems unnecessary as rates are really low already."
No. 4: Spot red flags. Now that you have a list of lenders, it's time to look at the fees they charge. Take notice of estimates that are particularly higher or lower than the rest. If one lender is charging significantly more for a third-party fee than the others, ask about it.
"If one lender is not disclosing a fee that another lender is, ask why," says Hanley. "I have seen competing bids where lenders purposely lowball a tax payment estimate in order to look like their estimate carries an overall lower cash-to-close figure."
Fees charged by the lender also can be negotiated. The best way to know what's negotiable is to ask the lender directly. Also look for "junk" fees, which are typically listed as "warehousing fees" or "processing fees" and are sometimes a way for unscrupulous lenders to increase their bottom line. "These are easy to spot because every lender doesn't charge them, so they stick out on estimates," says Lynda Conway, a real estate agent in Austin, Texas.
No. 5: Shop around for homeowner's insurance. Moira Vahey, spokesperson for the Consumer Financial Protection Bureau (CFPB), says even though the CFPB recently issued rules that "provide consumers with options to avoid costly force-placed insurance," the best way to avoid pricier insurance is to shop around. It'll reduce your closing costs and save you money long-term on your insurance premiums.
Look for new or added fees
Three days after submitting your loan application, your mortgage lender is required to provide you with a "good faith estimate" (GFE) of your expected fees and closing costs. You also should request a fees worksheet that breaks down the closing costs even further. "The GFE has a way of hiding fees by bundling several of them together into one fee," says Hanley.
If the fees have changed (the fees on your GFE aren't set in stone), ask your lender for an explanation. The GFE will tell you which fees could change prior to settlement and the maximum amount by which they are allowed to change.
Do a final check
At least one day before closing, request a copy of your HUD-1 settlement statement from your lender. The HUD-1 is the final statement of fees, so compare it to your GFE to make sure the fees and amounts haven't changed significantly.
Finally, if you do notice new or significantly higher closing costs, don't be afraid to ask about them. The CFPB advises homebuyers never to sign papers you don't fully understand. Lastly, consult with a real estate attorney about your options should you decide to walk away from the loan.
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April Dykman is a freelance writer, editor and blogger who specializes in personal finance, real estate, and entrepreneurship topics. Her work has been featured on MSNBC, Fox Business, Forbes MoneyBuilder, Yahoo! Finance, Lifehacker, Get Rich Slowly and The Consumerist. April holds a bachelor's degree in journalism and a now-inactive real estate license.