Rate Shopping? Be sure to read "Beware of the Bad Estimate" and "Best Rate or Lowest Cost" under the closing cost section for important information!What are Closing Costs?
A number of parties are involved in the process of buying a house. They include the lender, appraiser, insurance company, your local government, realtors, inspectors, and an attorney or title company.

Each of these parties charge fees for their service in processing and funding your loan. The Lender's responsibility is to explain to you what the services and costs are, and to give you an estimate of the total costs when you apply for a loan. This estimate comes in the form of a document titled Good Faith Estimate of Closing Costs. It is only an estimate, but it should be very close to your actual costs. We are not allowed to pad, or add onto the costs charged by these other parties, but rather simply pass on what they charge. The vast majority of closing costs go to third parties, not your actual lender. An exact breakdown and description of closing cost charges are at the end of this web page.

How to Compare Costs
Shopping is confusing. No matter what we're looking for -- from cars to refrigerators -- there's a built-in element of confusion. Why? Lack of knowledge. An unfortunate rule of thumb is that the less we know about something we need to buy, the more we can expect to pay for it.

Shopping for a mortgage is complex at best -- even for the savvy previous home owner. Daily rate changes, time-sensitive lock-in periods, points, lender's fees... plus the emotional element of probably the largest purchase any of us will ever make. Throw in to this already murky stew the ingredients of tricky rate advertising, commissions for every officer, agent and broker who 'helps' in your transaction, and the obscure differences between rates and fees. It's no mystery that many people settle for a mortgage that exceeds their monetary means out of sheer exasperation!

So, what can we do?

The answer is education. If we know how to shop for a mortgage -- the questions to ask, the language to speak, the tools to employ -- we then possess the knowledge to secure the best deal.

The following is a simple primer to shine a light of clarity into the darker corners of mortgage lending. Read everything, familiarize yourself with the terminology -- and see how easy it is to secure the best possible mortgage with the lowest possible costs.

Best Rate or Lowest Costs?
A common mistake shoppers make is to ask: "What's your best rate?." It is a logical question to ask, but does not give the response most borrowers need to make a proper decision. Borrowers must understand both rates and fees. Rates are only half the answer to getting the best deal. It is possible end up with the lowest rate but not necessarily the best deal.

Simply put, the lowest rate & the lowest fees do not go hand-in-hand. NO LENDER can offer both together. I can give you rock bottom rates, but it will cost you in fees. I can give you the lowest fees, but it will cost you in interest rate. Most lenders quote their best rate in combination with covering all third party fees (appraisal, credit report, title company, state taxes, county recording fees, etc) with 1% origination.

Click here to decide Best Rate or Lowest Cost for yourself. You may be surprised!

Tricky Quotes
As a lender, I don't mind losing a deal to another company if they can beat my rate and costs (which is rare). I DO mind losing deals to tricky advertising, and misleading quotes!

For example, when comparing loans, you were quoted: For a 30-year fixed $100,000 loan

1) Lender A has a rate of 7.000% with 0 points, 1% origination fee and $2000 in closing costs, plus prepaids.
2) Lender B has a rate of 6.625% with 2 points, 0% origination fee and $600 in lender's fees, plus prepaids.
3) Lender C has a rate of 7.000% with 0 points, and $3000 in closing costs

Which has the better deal?

Lenders A & C are about equal.

Lender B appears to have a lower rate, with lower costs. But in reality is the most expensive of the three, and a classic example of tricky advertising. Usually not until closing do you realize you are paying $2000 in "points" to get that rate, plus $600 in "lender fee's", plus $2000 in other fee's (escrows, appraisal, recording fee's. title company fee's, etc.) Total cost = $4600.

CONFUSED? - be sure to read these other articles:

1. Beware Of The BAD Good Faith Estimate
2. Protecting yourself against mortgage scams and screw-ups
3. ZERO Cost Loans - The real story
4. Thinking of breaking a rate lock?
5. Best Rate or Lowest Cost

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The question you should ask is:
"Which lender is going to charge me the least amount of money for the rate I want?"

Understanding Fees
Fees could be broken down into four categories:

• Discount Points and Origination fees -- Convert these fees into dollar figures to better understand associated costs. For example: One point is 1% of the value of the loan. A discount point or origination fee of one point would equate to $1000 on a $100,000 loan.
• Appraisal, credit report and county/state fees -- These fees do not vary greatly between lenders, but they do vary. Also, you should never ever pay an application fee! The most you should pay a lender 'up-front' is a credit report fee, and that should never exceed $55.00
• Miscellaneous lender charges (application fee, broker fee, processing , funding fee, wire transfer fee, etc.) -- These are the categories where most lenders hide their fees.
• Title/settlement charges-- Include title search, closing fee, survey, title insurance, etc. These fees are paid to a separate company from the lender, so in theory they should be excluded from a lender-to-lender comparison. You should keep in mind that these charges will need to be paid in connection with the loan.

Step-by-step process to get the "Best Deal"

• Pick the program that best suits your needs.
• Next, choose the rate you want. By choosing the rate first you eliminate one of the variables. You now can find out exactly which lender is charging you the least amount of money for the loan that you want.
• Closing Costs / Lender Fee's. PAY CLOSE ATTENTION. Many lenders will give you a ridiculous number that has no bearing on your real total costs by saying "OUR closing costs" or "OUR lender fee's" are X amount. Ask instead for the "bottom line", the "total amount required to complete the transaction", or even "what is the exact penny I will need to bring to closing?" By asking in this manner, you eliminate 99% of the misleading games some lenders play in attempting to make their costs sound so much better than everyone else. Please review the actual closing cost information listed below. A general rule of thumb for any Minnesota loan is $2200 plus 1% of the loan amount. Read Beware of the Bad Good Faith Estimate for more details.
• Ask the lender for a "Good Faith Estimate (GFE)" of settlement charges to verify if they are willing to put their pricing claim in writing. If they are not - RUN! Make sure to tell them you want ALL costs from ALL sources involved in the transaction listed on the estimate. You do not want anything listed TBD (to be determined).
• Review each Good Faith Estimate very carefully, especially if the estimate does not look exactly like a real final settlement statement (known as a HUD-1). Double check to make sure that EVERY cost associated with your loan is listed. All REAL competitive estimates should be very close in total dollar amount! All of our Good Faith Estimates will ALWAYS include every single dollar required to complete the transaction.
• Still Confused? Fax or call me a copy of the other lenders Good Faith Estimate. I will be happy to review it with you. If it is a good estimate, I'll be the first to tell you. If it is a bad estimate, I'll help you understand how and why it is a bad estimate.

Will my estimated closing costs differ from the actual costs?
Yes. In standard transactions, the difference between estimated and actual closing costs will vary. Any variances should not normally be a cause for concern if it is small. The final numbers should be very close if you were given a good, Good Faith Estimate. If you have questions about specific costs, call your loan officer. These differences between estimated and actual costs are a common source of confusion and frustration for borrowers. The main reasons for the difference between the estimated and actual costs are as follows:

• Different investors charge different fees for processing your loan application. Therefore, your choice of a loan product will determine the actual investor’s origination cost, administrative fees, etc. Since you normally receive the Good Faith Estimate before you lock in a loan, our fees can only be an estimates. But they should still be close.
• Your prepayment amount may vary. On a purchase, you might have to prepay certain expenses. To protect the collateral on their loan against your house, most lenders require you to prepay a year’s worth of insurance, as well as some property taxes up front. These amounts will vary and depend on many things, including the type of insurance you choose. You will also have to pay "days of interest" depending on what day of the month you close. This amount can vary greatly. We usually have no idea what day of the month you will be closing, so these costs are only estimated.
• When you close. Pre-paid tax escrows vary greatly depending on the month you close. If we originally estimated your closing for January 25th, but you really close March 5th, the differences could easily be several hundred dollars.
• Other fees may vary depending on which investor provides services for your application. For example, different title companies and appraisers have slightly different fee schedules, although they should be very close.

How do I pay closing costs?
Early on in the process you may write a check to the lender for an appraisal and credit report. At the end of the process, you may write a check to your title company to cover the difference of all the costs associated with the loan that could not be added to your existing loan. The title company will then transfer payments as appropriate to the other parties involved, including the lender, the insurance company, the local government, etc.

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Good Faith Estimate Glossary of Terms
You will find all of these items on your Good Faith Estimate

Lender’s Loan Origination Fee - A fee charged to the borrower by the lender for making a mortgage loan. The fee is usually computed as a percentage of the loan amount, and is normally 1% of the loan amount. This is NOT "Discount Points" Any lender not charging origination is almost always making up about the same amount of money by adding other charges (broker fee, processing fee, application fee, etc.) or having a higher interest rate. See "Beware of the Bad Good Faith Estimate" for details.

Lender’s Loan Discount Fee (POINTS) - Also known as "Points". A one time only fee charged by the lender to lower the interest rate normally charged. Each point is equal to 1% of the mortgage amount. Paying points to lower your interest rate may or may not be a good idea. It depends on your personal situation. Contact us for details.

Appraisal Fee - We need an appraisal in order to determine the security of the loan and the borrower’s Loan to Value (LTV). This fee can be rolled into the loan amount, paid in advance, or paid at the door to the appraiser who will research and assess the market value of the property on which a mortgage is being placed.

Credit Report - This fee is charged to pay a credit service agency to provide the lender with a full report detailing a borrower's credit history. We obtain an independent credit report, therefore we cannot reuse any prior credit report you may have. The credit listing is used as an indicator of the borrower willingness to repay the debt.

Tax Service Fee - The lender may require researching and/or examining the records of the Registry of Deeds for the county in which the property lies. Each property is reviewed to confirm that the taxes are paid in full and up to date. Any unpaid property taxes are a liability to the lender.

Broker Fee - Usually a junk fee, but not always. This is a fee charged to the borrower by the lender for making a mortgage loan. Any lender not charging origination is almost always making up some of that money by adding fee's other lenders DON'T charge (Broker fee, processing fee, application fee, etc). Beware of any lender charging both an origination fee AND a broker fee. See "Beware of the Bad Good Faith Estimate" for details.

Application Fee - This is usually a junk fee, but not always. Some lenders collect appraisal & credit report costs up-front and call it an application fee. Be wary if a lender has an application fee AND a separate appraisal & credit report fee. I feel you should NEVER pay this fee. Even if you don't do the loan, they keep this money!

Processing Fee - This is usually a junk fee that supposedly pays for the physical processing of your loan (paper, files, copying, etc.). Origination fees should cover processing!

Underwriting Fee - The final lender/investor's fee for reviewing your loan application. It typically about $250 - $300. Be wary of underwriting fees significantly higher than this.

Wire Transfer Fee - When you purchase the property, your lender might wire funds to an account, known as an escrow account of the title company, to cover the loan amount and the closing costs. The receiving account charges a nominal fee for the wire transfer. We try to send checks to the title company to avoid this whenever possible.

Administration Fee - Investor’s administrative fees vary widely. At the time of our estimate, you may not have chosen a specific loan product. Therefore, we don’t know the actual fee you will be charged for investor administrative costs. The final fee may be lower or higher than estimated, or non-existent, depending on the loan product. This is sometimes called a Commitment Fee.

Days of Interest - Lender’s charge interest from the very first day they fund your loan. The lender will require you to pay, at the time of closing, the interest charge from the date the loan is funded until the start of the following month. For example; If you close on March 20th, you will pay 10 days of interest. If you close on March 5th, you will pay 25 days of interest.

Mortgage Insurance premium - Private Mortgage Insurance (PMI) may be required on certain loans (usually those with less than 20% down). It is paid by the borrower and insures the lender against certain losses in the event of a foreclosure, and is considered a 'pre-paid' cost.

Hazard (Homeowners) Insurance - The lender will require you to insure the property you are buying, since the property is the collateral for the loan. At the time of closing you must pay the entire first year’s premium, for hazards such as natural disasters up front. Thereafter, 1/12th of the yearly premium will be paid each month so the lender has enough in your escrow account to pay for the next years premium when due. This is considered a 'pre-paid' cost.

State/County Property Taxes - Each state and county differs regarding the taxes that are due and payable up front. It also may vary greatly depending on what month you close. These are considered a 'pre-paid' cost. Call for details. MANY lenders under-estimate this charge on their estimates.

Settlement or Closing Fee - The fee paid to the Title Company for handling all the financial transfers and payments associated with the transaction. This is only one of many fees charged by the title company.

Doc Prep - A fee charged to actually draw up the legal documents you will be signing at closing.

Title Insurance - Guarantees that your new home has no other lien claims on the property and guarantees your undisputed ownership. Charged by the title company, but your lender requires that you have lenders title insurance on the home. Owners title insurance is also available for a small extra charge, and is highly recommended.

Recording Fees - To create a public record of your legal ownership of the property, the lenders notify the county government to record the transaction. This fee, which varies by state, is paid to the county.

City/County/Tax/Stamps - Stamps, affixed to the deed, showing the amount of transfer tax paid. Most states stamp the deed rather then actually affixing a stamp. It is a transfer tax that is collected, in some localities, whenever property changes hands. Minnesota's state tax is .0023% of the loan amount on ALL loans. (.0024% in Hennepin County)

Flood Certification Fee - Paid for a flood certification that states whether or not you are in a flood zone as determined by FEMA. The lender is required to track the life of the loan to identify the flood zone status. If a property is later rezoned into a flood area, the lender will contact you and require flood insurance. This fee is required even if your home is on top of the highest hill.

Escrows (Impounds) - Reserves Deposited with Lender - A reserve account that may be required by the lender. Taxes, insurance, and PMI (if applicable) are part of the monthly payment. The reserves are accrued in an escrow account that is set up by the lender and paid on the borrowers behalf when due. The amount taken varies dramatically depending on what month you close. Please call for an accurate quote.
 

Estimated Closing Cost Expense Worksheet
1.  Loan Origination Fee	1% of the loan amount for most loans.
2.  Discount "Points"	A percentage of the loan amount (ie - 1 "Point" = 1% of the loan amount. Points are monies paid up-front to lower your interest rate.
3.  Credit Report	Normally $2.50 - $55.00. Depends on what type of credit you have. Excellent credit clients usually pay $2.50.
4.  Appraisal Fee	Normally about $325 for conventional loans, $400 for FHA loans. Higher for 2-4 unit properties. Higher for JUMBO loans. May be lower if full appraisal is not required (depends on loan - ask for details)
5.  Underwriting	$275.
6.  Processing	Zero ($0.00) with us. (Usually $300 or more with most other lenders)
7.  Title Insurance	Varies, depending on type of loan (purchase/refinance), loan amount, etc. Lenders policy is required. Owners policy is optional. Call our loan officers or title company for exact quote.
8.  Plat Drawing Inspection	$60.00
9.  County Recording Fees	$50.00 or more.
10.  Flood Certification	$20.00
11.  Name and Assessment Searches	$24.00
12.  ARM Title Insurance Endorsement Fee	$50.00 (only if getting an ARM loan)
13.  Mortgage Registration Tax	$2.30 per $1,000 of the loan amount. $2.40 per $1,000 of the loan amount in Hennepin County.
14.  Closing Fee. This fee is paid to the title company.	Normally about $250.00. See above. There are a lot more fees paid to the title company than the closing fee. NOTE: see #'s 7,8, 9, 11, 12
15.  Misc. Fee's	Varies, but figure about $350.00. This includes things like courier fees, etc.
16.  Prepaid Interim Interest. Also known as "Days of Interest"	We recommend one full months interest be estimated. (Loan amount x interest rate = annual interest, divided by 12 months = monthly interest). Assumption: If closing occurs on the 20th of the month the buyer will be required to pay 10 days of interest at closing.
17.  Homeowners Insurance Premium (1st year)	An estimate of the annual premium may be computed by multiplying the purchase price by about $4.00 per one thousand. This is purchased separately, prior to closing. Contact your Insurance agent for quotes. NOTE: See item #19 also.
18.  Private Mortgage Insurance Premium (PMI)	The amount varies depending down payment & loan program. The smaller the down payment, the higher mortgage insurance costs. Generally, PMI is not required if the buyer is making a 20% down payment. Contact your loan officer for a quote.
19.  Homeowners Insurance	At least two months are collected at closing to open the escrow account for a purchase loan (maybe higher for a refinance). This amount is in addition to the one year policy paid for in advance by the buyer prior to closing on a new home purchase.
20.  Property Taxes	In most situations, at least two months, and up to 7 months of the annual property taxes must be escrowed to open the escrow account. The amount collected depends on what month you close your loan. In addition, any pro-rated taxes must also be considered. Please contact us to obtain the exact figure.
21. Flood Insurance	This will be required if the property is located in a designated flood zone. The 1st year premium would be required along with at least two months estimated premium for the escrow account.