Comparing Closing Costs Ring, ring, ring. Hi, I am having difficulty comparing closing costs from different lenders. The numbers vary considerably and I am not sure what to believe. How do I make a valid comparison? 

You are not alone in having difficulty comparing closing costs as Good Faith Estimates can be difficult to understand. In fact recent studies have found that consumer confusion leads to higher closing costs. On the other hand, some estimates which are higher may be more accurate as they encompass all costs and provide realistic estimates. Adding to the confusion are different disclosure rules between banks and brokers. 

At this point many people start to roll their eyes and they say just tell me how much to write the check for. The good news is that there is a way to compare costs between programs so you can make an informed choice.  

Rather than focusing on individual fees in the beginning, let’s look at where the fees are going. The best way to compare costs is to group them into three separate categories of where they go. There are bank / broker fees, 3^rd party fees, and prepaids and escrows for interest, taxes and insurance.

Let’s work backwards and start with the prepaids and escrows. These monies are going to pay the initial interest on the loan during the first month and put enough in a reserve account so taxes and home owner insurance can be paid when due. At the outset no one knows exactly what these numbers will be because they are dependent upon the property’s taxes, insurance costs, and the day of the month of closing. None of these expenses has anything to do with the loan. These charges will be what they are so this section must not be used for any comparison. If the figures are very different, it would be a good idea to ask how they were calculated.

Third party fees should be reviewed next. These are fairly straight forward and should be within the same range irregardless of the lender. As an example, attorney, title, appraisal, survey, inspection etc. fees represent the costs of the services and do not vary by lender. The only exception would be if the lender or seller paid them in-full or in-part. These fees are for outside services and their costs will be what they are. In many cases, the borrower will even be picking the service provider.  

The last grouping of broker / banker fees is where there could likely be some big differences. Origination, points, broker, lender, application, credit, commitment are some of the more common fees which are encountered. The best approach is to add all these fees up and discuss them with your loan representative so you can understand and compare them. Since you have already taken out the 3^rd party fees and prepaids and escrows, comparing the real costs of the loan has become much easier.  

Many borrowers are confused when they get to the line which contains the yield spread premium (YSP). This is paid to the broker by the lender typically to compensate the broker for originating and processing the loan. This is not an added expense for the borrower as the lender pays it. Banks do not have to disclose this fee since they are originating, processing and funding the loan themselves. They are, of course, still earning it. 

Is this fee a concern? It should only be an issue if your interest rate is high. As interest rates rise, this fee also rises. The bottom line is to get the best competitive rate with low closing costs then the fee paid to the broker will be reasonable and in-line with what the banks are earning and not disclosing.  

Breaking closing costs up into these three separate categories makes them more understandable and manageable for comparison purposes. Any discrepancies or omissions can easily be spotted so true loan costs can easily be compared.  

Good luck with your financing choices as traditional good solid loan programs remain at still very competitive rates.

David Field creates sound mortgage solutions with Carolina Home Mortgage and can be reached at 919-869-8204 or on the web at www.loansnc.com