How do you determine if you are being ripped off on mortgage closing costs?
The best way to determine if you are being ripped off on your closing costs is to compare your Closing Disclosure to the Loan Estimate that the lender provided at the beginning of the mortgage process.
When you apply for a mortgage, the lender is required to provide a Loan Estimate that outlines your estimated mortgage terms, including your interest rate, APR and closing costs, within three days of submitting your application. The lender is also required to provide a Closing Disclosure that outlines your final, actual mortgage terms at least three business days before your loan closes.
These documents are issued to applicants according to mortgage industry guidelines so all lenders use the same template. The purpose of these documents is to prevent a bait and switch -- when the lender promises you one set of mortgage terms to win your business and then delivers a worse set of terms when it is time to close your loan and you have no other options.
The Loan Estimate and Closing Disclosure are designed to be compared so you can identify potential changes in your mortgage terms such as significantly higher closing costs. The Closing Disclosure specifically outlines how much closing cost items can change according to mortgage regulations, which we summarize below:
Mortgage Closing Cost Items That Cannot Change: mortgage rate, lender fees and costs you were not allowed to shop for
Mortgage Closing Costs That Cannot Change By More Than 10%: non-lender fees for service providers that you selected from a lender recommended list and recording fees
Mortgage Closing Costs That Can Change Without Limit: prepaid interest; homeowners insurance fees; impounds for property tax, homeowners insurance and mortgage insurance; fees for service providers not a lender recommended list; and, fees for any services not required by the lender
Now that you know how much a specific closing cost item can change, you can compare your Closing Disclosure to your Loan Estimate. If the cost for a specific item changed more than the regulations allow, this is a sign you could be getting ripped off.
Review How to Compare a Closing Disclosure to a Loan Estimate
For example, if the lender fees or mortgage rate increase without reason, this is not permitted according to mortgage guidelines. If you find these or any other significant issues when you compare the documents, you should immediately request an explanation from the lender.
If the lender provides a satisfactory explanation or makes a correction to your mortgage terms then the next step is to move forward and sign your loan documents. If the lender cannot explain why your closing costs increased and you think the lender acted in a fraudulent manner, you should can cancel, or rescind, your mortgage.
For a home purchase mortgage you can cancel the loan any time before you sign your mortgage documents. This is why lenders are required to provide the Closing Disclosure at least three days before closing - so you have time to review the document. For a refinance, you can cancel the loan up to three days after you sign your loan documents. Regardless of the mortgage type, we recommend that you never sign loan documents unless you are completely comfortable with the loan terms.
Please note that under certain circumstances, your mortgage terms, including your closing costs may change more than the guidelines outlined above permit. If information in your loan application changes over the course of the mortgage process, your loan terms may change as well. For example, if your credit score dips or your down payment changes, your mortgage rate and closing costs may increase.
If the key information in your application is the same, including both your personal information and property details, then your mortgage terms should remain relatively unchanged. In this case, the limits to changes in your closing costs outlined above apply and any significant increases are a sign you could be getting ripped off.
If you ultimately decide to cancel your mortgage you are free to work with any lender you choose. In this scenario you are out certain non-refundable costs but you may save more money by paying lower fees and possibly a lower mortgage rate with a new lender.
The table below shows mortgage terms for leading lenders in your area. If you are considering changing lenders we recommend that you compare multiple lenders to find the mortgage that is right for you.
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Sources
"What is a Closing Disclosure?" Consumer Protection Topics - Mortgages. Federal Deposit Insurance Corporation, September 12 2017. Web.
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