New York (CNN/Money) - With mortgage rates seemingly as low as they've ever been, financing a house is dirt cheap these days, right? Not exactly.
"Buying and refinancing a home in this country is too complicated, unclear and costly," said Brian Sullivan, a spokesman for the Department of Housing and Urban Development.
To that end, HUD has proposed rule changes that would make it easier for consumers to shop around for the overall package. By the department's estimates, it could shave as much as $1,000 off a typical mortgage transaction.
|Fee ||Average cost* |
|Application ||$258 |
|Appraisal ||$309 |
|Credit report ||$31 |
|Document preparation ||$210 |
|Processing ||$333 |
|Recording ||$79 |
|Underwriting ||$227 |
| *Based on a $100,000 loan. Not every lender surveyed charges all of these fees.|
| Source: HSH Associates survey of lenders|
Under current regulation, lenders are not required to stand behind their good-faith estimates, which spell out closing costs. They can, and sometimes do, add or inflate fees in the eleventh hour of a transaction. (Borrowers have the right to see their final settlement statement one day before closing, but most people choose to pay the extra cost rather than back out on the deal at the last moment.)
The new rule, which could take effect as early as this summer, would require lenders to either bundle their closing costs into a single guaranteed fee or stay within 10 percent of their good-faith estimate.
Get friendly with your current lender
Federal regulations and mandates aside, there are a number of things you can do on your own to try and lower closing costs.
If you're looking into refinancing, the first call you should make is to your existing lender, who already has critical information about you and your house on file. Since you have an existing relationship, a "streamlined" process might be possible. That can save you a lot of extra paperwork and money on everything from application fees to appraisal fees.
Although fees for title search and title insurance are not determined by the lender, you may also get a break there. "If you recently refinanced or took out a loan, you can save 30-to-50 percent on title insurance by asking for a reissue rate," said Sullivan. "Your lender should ask on your behalf for this reissue rate."
(In reporting this story, I decided to test out this advice to see if I could trim some interest off my own mortgage, by asking my lender for a streamlined refinance. To my surprise, I was able to reduce my 7-year adjustable rate mortgage from 5.25 percent to 4.25 percent with no points. In fact, there were very few fees at all, other than those charged by the title company. Had I gone with another lender, I might have paid twice as much.)
If you're a homeowner shopping for a new house, you should also try giving your existing lender first dibs on the new business. If you've been a good client and your lender originates the kind of mortgage you're interested in, it's possible to get a better-than-market deal, according to Keith Gumbinger, vice president for HSH Associates.
Get nitpicky about fees ...
As anyone with a mortgage knows, there are more than a dozen kinds of fees that could show up on your final closing statement, including credit report fees, appraisal fees, document preparation fees, title fees, recording fees and underwriting fees.
All told, fees on a $200,000 mortgage could add up to anywhere from $1,000 to $3,000 – that's not including any points you pay up front to get the best interest rate. (A "point" is a fee that equals 1 percent of the loan amount.)
|More on mortgages
Lenders are required to give you a good-faith estimate of your closing costs within three days after you apply for a loan. Some will give you such an estimate even before you apply if you ask for one. Even if it is no guarantee, this written estimate will give you an idea of what kind of fees you can expect to pay, as well as an opportunity to negotiate for a better deal.
"If you're a good credit borrower you can challenge fees if they seem excessive," said Gumbinger, noting that lenders don't control many fees that show up on your statement. "Just remember that these guys are flush with business right now. If you're hardballing over $100, the lender might just tell you to have a nice day."
... but keep the big picture in view
Closing costs are certainly a consideration for both new loans and refinancing. But it's important to not lose sight of what should be your first priority – getting the lowest rate possible.
Indeed, the difference between the interest on a 5.25 percent loan and a 5.5 percent loan adds up to more than $11,000 for a $200,000 30-year loan. If you have to pay a few hundred dollars in closing costs to get that rate, you can rest assured that it is a worth investment.
It may even be worth it to pay a point or so up front in order to lock in the lowest rates. Let's say that you'll knock your rate down to 5 percent on that $200,000 loan by paying an extra point ($2,000) up front. Considering that you'll cut $62 off your monthly payment and $22,293 from total interest by going from 5.5 percent to 5 percent, it makes sense as long as you plan to stay in the house long enough to recoup those upfront costs.
In fact, if you're short on cash you might even consider rolling the closing costs into your loan, if that is an option. You'll want to consider how much more you'll pay each month as well as in interest over the life of a loan.
In this case, you'll pay an extra $11 a month and about $1,800 in total interest if you roll $2,000 in finance costs into a loan with a 5 percent rate. Although you added $2,000 to your loan, you're still better off than if you had not refinanced at all.