How to Avoid
Unnecessary Closing Costs

by Jeff Ragan

What kind of unnecessary closing costs are included in the mortgage papers?

Avoid unnecessary fees that are on your mortgage closing costs estimate. The best information to help you save money by avoiding possible junk fees that are disguised as a closing cost is discussed below.

These type of closing costs have become too prevalent in the mortgage industry. Now, you need to realize that this still does not mean that every closing cost is unnecessary. It does mean, though, that you want to be especially careful when you check that good faith estimate.

If you are a first time home buyer, the good faith estimate or GFE is a document that any mortgage lender must give you within three days after you make a mortgage application with them. The GFE is intended to list for you all of the closing costs that you will be responsible for.

unnecessary closing costs

But those words "faith" and "estimate" are there because the lender does not have full control over all final closing costs. This is understood by the law, and so the lender is only responsible for estimating, as closely as possible and with all good faith toward you (that is, being trustworthy in the estimating), what those closing costs will be.

Note: if you are refinancing a mortgage, it is possible, based on the equity in your home, to finance many, perhaps most, of the closing costs. Keep in mind that this will raise your total mortgage amount and thus monthly payment correspondingly, but it might be truly helpful to you in the immediate moment.

Unnecessary Mortgage Closing Costs

An unnecessary closing cost would be one of two things:

  • It could be a cost that is really not needed but is put there by the less-scrupulous mortgage lender just for pure profit.
  • It could be something even more dishonest: a fee that the lender never even included on the GFE but surprises you with at the closing table. Again: this would not be one of the legitimate closing costs shown on the original GFE coming in higher at closing, beyond the lender's control.

If you go through a mortgage broker your closing costs will almost always be higher than if you go directly through a bank, because the brokerage has to make money for its time and service. So why would you use a broker? You would do that if a bank will not take you. Brokers have access to more mortgage programs than most banks do, especially those that help people buy homes when they have blemished credit.

So, do not jump up and compare a bank's closing costs with a broker's and assume the broker has included "junk fees". You have to know what you are looking for.

Remember, you want to bring your copy of the original GFE with you to the closing table and do not let any unexplained or suspicious-sounding surprises on the final copy escape your notice. If you see that one of the originally estimated fees has risen, do not hesitate to ask why. Especially if the lender's representative does not volunteer an explanation.

Banks and lenders today have expenses that they must recoup at closing. The reason for this is while processing your loan they do spend all that money. These costs may and typically do include: title company fees; contract underwriting; escrow agent fees; and processors' fees.

Other perfectly legitimate closing costs include those for appraisers, surveyors, home inspectors, state and local taxes, and whatever money you may have to place into escrow.Lenders today do not usually make any money on the mortgage interest, because the system today is that they sell the mortgage on Wall Street. So, they have to make their profits in the closing costs as well as whatever purchase price they get from Wall Street investors. They do this mainly by charging a loan origination fee.

A loan origination fee is not an unnecessary closing cost. However, it may be negotiable. You may also use "points" to buy yourself a lower interest rate and thus lower monthly payment. Keep in mind that brokers are much more likely to aggressively sell you on paying points than banks are--in fact, they may need to charge points to make any money.

Paying points for a lower interest rate can be a very good idea, but it is up to you to decide if you think it is worth it to pay possibly $4,000 or more in additional monies at the closing table. To decide upon this, ask your loan officer for a written comparison between life-of-the-mortgage total Principle & Interest payments (P&I) for different loans with 0, 1, 2, and 3 points paid.

If you are applying for a first time home purchase and you have blemished credit, you will be paying points. There is no negotiating (unless you want to pay even more than required) and none of these represent an unnecessary closing cost.

Possible Junk Fees

Two fees that are always unnecessary closing costs and are notorious are the "underwriting fee" and the "loan inspection fee". Do not close any mortgage deal with any lender that tries to put those in. Also, many lenders offer to refund your application fee at the closing table if your mortgage is approved. Most of them mean it, but some conveniently forget--and hope that you do, too. Do not close if they try to pull that on you!

If you can afford a mortgage attorney, hire one and bring him to the closing with you. If not, use common sense, your original GFE copy, and avoid getting taken in by any illegitimate closing costs.

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