Are mortgage closing costs negotiable?

Some Mortgage Closing Costs May Be Negotiated...

By Mark Barnes

Direct Lending Solutions Staff Writer

If you buy new windows, you’ll not only pay for the windows, you will also pay an installation fee. When you purchase a car, you pay tax, title, assumption fee, etc. Just about every major purchase comes with extra costs or fees, and mortgages are no different. Most people think they don’t have to pay costs on a loan, because they are paying interest on the loan (they figure this is their fee – a premium on the money). Mortgage closing costs, though, are a reality.

While some are mandatory, others are not. Follow these guidelines, and you’ll never pay too much for mortgage closing costs.

The origination fee -- The fee that bothers people the most is the origination fee, or what some mortgage people call a broker fee. This is often confused with points, but should not be. Points are something completely different. The origination or broker fee is what you pay the loan officer to originate or create and complete your home loan, whether it’s a purchase or a refinance. All mortgage people charge them, whether they work for a mortgage brokerage or for a bank.

Remember, if you’re told there is not a broker or origination fee, chances are you’re paying a higher interest rate, and this is how they’re making this fee. The origination fee is the primary way mortgage brokers make money. The company gets the entire fee, and your broker or loan officer gets a percentage of that fee – somewhere between 30 and 65 percent.

So, if your mortgage broker charges you two percent on a $100,000 loan, this is $2,000 for his company or bank and up to $1,300 for him. You may think this is an outrageous amount of money, especially considering that this is just one of the costs you have to pay, in order to complete you loan. It might be, and then again, it might not. It depends on what type of loan you get, how much work is involved in closing it, and the quality of the service you get. Here are a few guidelines on what you should be willing to pay in origination or broker fees.

Bad credit’s effect -- If you are a sub prime borrower, or someone with credit problems, expect to pay more – up to $3,000 or $4,000. Remember, sub prime, or non-conforming, borrowers have some type of baggage that makes them difficult to get approved, which is a huge part of the mortgage professional’s job. They may, for example, have a recent bankruptcy or foreclosure on their record, or a civil or criminal judgment, tax liens on the property, or very little equity in their home. These are problems that good mortgage professionals can get around, but it takes a lot of time and effort. A mortgage professional may charge more for this type of work, but it will be worth it for the borrower.

Conversely, let’s assume you’re refinancing your home in a perfect scenario. You have perfect credit, lots of equity in your home, plenty of cash reserves, and the paperwork is very easy. The loan officer says he can complete your loan in two weeks, most of which will be consumed by the work of other people, such as title agents and an appraiser.

This origination should not be much more than one percent of the loan amount and even smaller, if the loan amount is over $150,000. This is a loan that mortgage people refer to as “A Paper.” It is very easy to close, and takes very little work, so the loan officer can make his money on volume, by doing lots of these types of loans. I always charged one percent or less for an A Paper loan, when I was a full-time loan professional.

So, begin learning your closing costs by finding out what the origination fee is (remember, most of the time it’s negotiable). One to two percent of the loan amount is acceptable, unless extraordinary circumstances exist.

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