Watch Out for 'Junk' Mortgage Fees

For most people, buying real estate is an uncommon occurrence. Engaging in a real estate transaction just once or twice in a lifetime provides little opportunity to become intimately familiar with the process. There are mountains of paperwork to sign, a confusing new vocabulary to deal with, and a host of fast-talking sales people—from real estate agents to mortgage brokers—who smile, point, and tell you where to sign.

Somewhere in the mix of elation at purchasing a property and boredom from signing forms, it's easy to lose track of what you're paying for and how much you're spending. Aside from the amount of the mortgage, most of the other expenses get lumped into a category referred to as closing costs. Paying attention to these costs before you get to the closing can help you understand where your money is going and maybe even save you a few hundred dollars.

The phrase "closing costs" is shorthand for the total cost of several dozen potential expenses associated with purchasing and financing real estate. These expenses can be categorized as "recurring" and "nonrecurring."

Recurring Costs

Recurring costs get paid not only at closing, but also on a monthly basis thereafter. These include real estate taxes, homeowners insurance, and—if you're putting down less than 20% of the purchase price—private mortgage insurance (PMI), which you will want to avoid paying for, if you can.

These expenses must be funded in advance at the time of purchase, which is done by putting them into an account so that they are available to cover the next year's obligations. This is known as putting the money in escrow. Depending on your closing date, it may also be necessary to prepay interest to cover your first few days or weeks in the home.

Nonrecurring Costs

Nonrecurring costs are also paid at closing. They may include:

• Points
• An application fee (profit for the lender)
• A series of loan fees (these may include an origination fee, appraisal fee, credit report fee, tax service fee, underwriting fee, document preparation fee, wire transfer fee, office administration fees, etc.),
• A broker's service fee (if you are working with a mortgage broker)
• Any lender-required home inspections (such as a pest inspection)
• The cost of a lender-required home appraisal (in which someone is paid to verify that the property is worth at least as much as the selling price)

Other Costs at Closing

Closing costs may also include:

• Federal Housing Administration (FHA) fees
• Veteran's Administration (VA) fees
• Rural Housing Service (RHS) fees associated with mortgages guaranteed by the government
• A flood determination fee to investigate whether the property is in an area prone to flooding
• A land survey to verify the property's boundaries
• Title charges (which may include a settlement fee, title search, title examination, closing service letter, deed preparation, notary fees, attorney's fees, and title insurance)

A host of other miscellaneous costs may include a courier/delivery fee, endorsements, recording fee, transfer tax, and optional home warranty.

Fees vary widely based on the lender, the geographic location of the property, and the price of the home. Consult Your Home Loan Toolkit, prepared by the Consumer Financial Protection Bureau, as a guideline when evaluating fees. Bank Rate has also broken down average closing fees by state; referring to that chart can give you a benchmark, depending on your home's location.

"Garbage fees," also known as "junk fees," are tacked on to most mortgages. There is no way to completely avoid them, but you can often minimize them.

Look out for excessive processing and documentation fees in the following five categories:

• Application fee
• Underwriting fee
• Mortgage rate lock fee
• Loan processing fee
• Broker rebate

If any of these fees seems to be unusually high, ask about them, as they can often be negotiated. This advice applies to other fees as well. If it looks funny, ask about it. Often, the mere act of questioning the fee will result in the fee being lowered or eliminated.

Realizing that consumers are overwhelmed by the fees and frustrated at the process of trying to determine whether the fees are fair, some lenders now offer all-in-one, flat-rate fees that include all closing costs. The "all-in-one" terminology is also used to describe other mortgage products, such as mortgages that are tied to checking accounts, so take care when you're shopping for these products that you purchase the one that applies strictly to mortgage closing costs and not to other banking relationships or products.

As a general rule, you can expect to spend from 3% to 5% of the price of the property in closing costs.

If the real estate market in your area is favorable to buyers, you may be able to ask the seller to pay closing costs. If that isn't an option, getting an all-in-one mortgage is probably the best way to minimize the feeling that you are being taken advantage of during the closing process. While you are still paying the fees, you won't need to despair over them one fee at a time.

Comparison shopping is another way to get comfortable with the process and get a better feel for the costs. Ask half a dozen lenders to provide loan estimates and compare the results. This will help you learn the terminology and get a sense of the range of closing fees in your area. Once you choose a lender and have a loan estimate in hand, save it. It will come in handy later.

The official form that includes a breakdown of all closing costs is called a closing statement. You have a right to see the closing statement document 24 hours in advance of closing. Ask for it and compare it to the loan estimate. If the numbers aren't reasonably close, ask questions.

By spending the time to comparison shop and by carefully reviewing all documentation in advance, you can minimize the expense and anxiety associated with the closing costs you incur when purchasing real estate.