Mortgages: the Closing Cost Minefield

When my new partner and I bought a condominium last month to accommodate our combined stuff, I remembered that borrowing so much money can be an emotional, even terrifying, ordeal.

It’s difficult to think clearly.

But attention should be paid to closing costs, which add to the cost of buying a house.  So I decided to apply my skills as a veteran newspaper reporter and grilled my lender, attorney and real estate agent about these costs.

Despite my diligence, I was only modestly successful at reining them in.  But I stepped on a few land mines that might help other homebuyers:

The HUD-1 matters:

Federal law requires prospective mortgage lenders to provide loan applicants with a “good faith estimate” of the closing costs within three days after they submit the application.  This “GFE” is your lender’s best guess of the final fees they’ll charge for originating your loan.

My lender promptly sent the GFE.  But the bank’s salesman promised to reduce the closing costs shown on the GFE, and I had to repeatedly nudge him to provide the more important document: the HUD-1 statement of my actual closing costs.

I wanted to see how much savings he was talking about.  He kept indicating on the phone that I’d be happy with the final amount, and I finally relented and decided to believe him.  That was my first mistake.

Closing costs are negotiable:

Lenders do have wiggle room to reduce closing costs.  When I finally got the HUD-1 statement – two days before closing – I compared the bottom line estimate of costs (about $4,000) with the bottom line in the GFE (about $6,000).  “Great!” I thought.  That was my second mistake.

Not until I sat down to write this article did I compare each line item in the GFE with its corresponding charge in the HUD-1.  I actually saved only $500 – not $2,000.  Here’s why: we had paid two costs included in the GFE outside of closing: homeowner’s insurance ($1,000) and the appraisal fee ($350).  This meant my actual savings were quite a bit less than I’d thought.

These are the costs the bank did reduce: the fee for the bank’s title insurance (by $369), our title insurance fee (by $100), and government recording fees (by $35).

Title insurance mystery

Title insurance boils down to a financial gamble.

Title insurance protects the buyer against some unknown claim popping up on the property by a previous owner or even a contractor who worked on the house.  My real estate agent and the attorney handling our purchase assured me there were horror stories about people who hadn’t bought the coverage and regretted it.

But do buyers really need it?  Lenders conduct their own title searches and have every incentive to make sure they’ve scrubbed the properties backing their loans.  My bank’s loan officer confided he thought it was a waste of my money to pay for a second scrub.  In the end, we bought the insurance for $880.  Was that my third mistake?

Closing day surprise

When something called an “oil adjustment” appeared on Line 112 of our HUD-1, we didn’t think much about it.  But at the closing, it dawned on me.  We’d have to reimburse the seller for fuel oil she’d left in the tank in the basement – even though we were converting the heating system to natural gas.

We challenged it.  Turns out the oil adjustment was not spelled out in the purchase and sale agreement, and she didn’t have a legal leg to stand on.

Disputing the charge at the closing late that Friday afternoon added to our closing-day anxiety.  But it was the right thing to do.  We saved $963.

Three tips for homebuyers:

1. Don’t take short cuts due to the pressures and emotions of homebuying.  Get at least two quotes from mortgage lenders so you can compare their closing costs – as well as their interest rates.
2. Compare your GFEs and HUD statements line by line as early as possible, so you have time to negotiate the closing costs.  If the lender or mortgage broker balks at your request to preview the HUD statement prior to closing, inform them of your rights.
3. Trust but verify.