Closing costs study reveals a shell game

N. PALM BEACH, Fla. -- Nov. 7, 2003 -- Comparing mortgage closing costs is one of the most confusing, frustrating exercises a consumer will go through. A survey by Bankrate.com shows why.

To make sense of mortgage offers, it helps to be incredibly organized. Mike Shust is. When the engineer from suburban Houston refinanced his home loan this summer, he collected good faith estimates of closing costs for various loan scenarios and plugged the numbers into Excel spreadsheets. He analyzed those spreadsheets as if thousands of dollars were in the balance -- which was the case.

"It took a lot of time," he says, "primarily because I wasn't comfortable with anyone else figuring it out for me. I don't think anything particularly was hard to understand. The hardest part was figuring out which costs were firm and which were mushy."

He ended up doing business with Kelly Malatesta, a loan officer from the Houston office of Chase Manhattan Mortgage who didn't give him "mushy" numbers. "For all intents and purposes," Shust says, "my good faith estimate matched my closing."

Shust aided himself by getting loan estimates from three sources. One was the mortgage broker he used when he bought the house. Shust quickly eliminated the mortgage broker from contention after analyzing the numbers from the purchase transaction in 1999. Shust discovered that the broker had slickly pocketed an extra $1,000 from Shust and $500 from the home's seller by manipulating the good faith estimate and final closing statement. "Basically, he got my earnest money," Shust says.

Determined not to be bamboozled again, Shust closely examined good faith estimates he got from Wells Fargo and Chase, which were comparable. Both loan officers seemed trustworthy and readily answered his questions, and he finally chose Chase because it offered an unmatchable rate on the day he locked.

Shust did a lot of things correctly. One was to seek referrals for trustworthy loan officers. Another was to ask a lot of questions and to insist on getting firm, accurate estimates of all the closing costs. He let everyone know that he wouldn't be pushed around. Shortly before the closing date, the title company told him that he might have to write a $2,800 check at closing instead of $2,400, so Shust got an estimate from a competing title company and let everyone know that he was willing to use the competitor. The tactic worked.

Shust's paperwork was rather straightforward, but not everyone is so fortunate.

Bankrate.com's anecdotal, unscientific survey of closing costs shows a wide variation in what lenders charge and what they call those charges.

Bankrate.com gathered closing-cost information in 50 states and the District of Columbia. Researchers found lenders that calculate good faith estimates on their Web sites. The researchers then collected online good faith estimates from six lenders that do business in each state and the district, for a total of 306 good faith estimates.

All the estimates were based on a $180,000 purchase loan to an applicant with good credit and making a 20 percent down payment on a single-family residence. It was assumed that the loans would have escrow accounts for the payment of insurance and taxes.

Some lenders charged origination points, which vary with the size of the loan. Others did not charge origination points, but charged administrative fees and lender fees. Some lenders didn't charge those fees, but levied document preparation, processing and underwriting fees.

Whether they're called origination points or administrative or lender or document preparation or processing or underwriting fees, all those charges appear to go toward overhead and the lender's profit. The total cost of these fees varies. In Michigan, for example, Countrywide Home Loans quoted a total of $430 in origination fees, while E-Loan quoted $3,498.

Wide variations were found, too, in other categories of fees: title-related charges (such as attorney and settlement fees, title searches and plat drawings, and title insurance), other third-party charges (such as pest inspections, courier fees and flood certifications), and government charges (recording fees and state and local taxes).

One thing to watch out for is title insurance. Most lenders in the Bankrate.com survey estimated the cost of a title policy. But a few lenders, such as Countrywide Home Loans, don't, because they assume that the seller pays for title insurance. To make valid comparisons, you have to make sure that all the offers contain an estimate for title insurance or compare the offers minus the estimated cost of a title policy.

It's not really the wide variations in cost that bothers borrowers. They can make sense of those after a few hours of brain-melting effort. Borrowers are bugged by expensive surprises at the closing table when actual expenses far exceed estimates.

Housing Secretary Mel Martinez was ambushed by unexpectedly high costs at closing when he moved to Washington in 2001, and he reacted by proposing new rules governing the way closing costs are estimated and disclosed. The proposals are pending and have not been put into effect. One proposal would allow lenders to offer borrowers a binding, one-price package of all closing costs, without having to itemize all the fees. In exchange, lenders would get negotiating flexibility with third-party providers that they don't have under the current rules.

Some lenders offer one-price packages already. The most well known, ABN AMRO's OneFee, "provides certainty and a guarantee to the consumer," says Rhodes, the mortgage group's president. "The consumer now has no uncertainty as to what they're going to be paying when they come to the closing table."

Mortgage shopping often comes down to finding a trustworthy broker or loan officer. That's what Rich Veno found when he bought a house this fall in Annapolis, Md.

Veno talked with two brokers. One was his boss's son. The other, Allan Gushue of Bicoastal Mortgage in Timonium, Md., came to Veno's attention through a referral from a co-worker.

Veno recalls one of his first conversations with Gushue. "He said, 'Rich, you might get a better rate quoted out there, but I'll tell you one thing: You won't get any surprises with me. This is what I charge. I charge my application fee. I have my credit check fee and I have my origination fee and there might be one more fee in there, but that's it."

Sure enough, Veno had only one surprise at the closing table -- the courier carrying his lender's check arrived an hour late. Something about a truck breaking down. After 15 months of searching for houses in an area spanning from the Appalachian Trail to the Chesapeake Bay, the glitch with the truck was no big deal.

"The financing of the house was easy," Veno says. "The finding it was difficult."

© Copyright 2003 Bankrate, Inc., 2003. All rights reserved.