Mortgage Closing Costs: What You Need to Know

Closing on a home often involves signing on the dotted line on a tall stack of paperwork, much of which is confusing and difficult to understand. It’s no wonder that many people are surprised by some of the charges that make up mortgage closing costs. In fact, the average origination and third-party fees on a $200,000 mortgage come to nearly $4,000, according to a Bankrate survey.

With that in mind, the California Society of CPAs recommends taking these steps to ensure that you understand closing costs and are in a position to minimize them wherever possible.

Do Your Homework

Before you even get to the closing, take the time to shop around for a loan so that you are aware of what’s available and who has the lowest rates and fees. While cutting closing fees is a great idea, keeping a lid on your total loan costs can save you thousands of dollars over time, so be sure to compare offers.

Although you’re not an actual customer yet, many banks will be willing to offer an estimate of closing costs at this point, so be sure to ask for one to get an initial idea of what your overall loan costs will be. In addition, if you have any questions about what’s included, it’s great to get your answers in advance so you understand the process once it’s under way.

Get Your GFE

Lenders are required to provide borrowers with a good faith estimate (GFE) of potential settlement costs no more than three days after you apply for a loan. You should be aware that the final charges may legally be as much as 10 percent higher than what is shown in a GFE. If you believe the fees in a GFE are too high, don’t be afraid to challenge the lender and make it clear that you might still decide to take your business elsewhere if they are unwilling to negotiate.

The GFE will also set forth the loan amount, term and interest rate, and spell out any penalties or special loan features. Be sure to ask the lender to explain any terms or fees that don’t make sense to you.

Get the Final Tally

Remember that the GFE is only an estimate. Before the closing date, ask for a list of final settlement costs and compare them to the original GFE. If there are some notable additions or changes, be sure to question the lender about them.

Look for Duplications

Among the things to review in your GFE are any possible duplications of fees you may have already paid. For example, if you’ve already written a check for an appraisal early on in the process, don’t get charged twice for it. Point out the problem to the mortgage lender or broker and have it removed from the total.

Check Government Resources

The U.S. Department of Housing and Urban Development offers numerous resources for home buyers, including information on borrowers’ rights and on the laws governing mortgage settlement procedures.

Figure Out What’s Tax Deductible

One last point: While most mortgage closing costs generally are not deductible, the points that you pay on your mortgage may be. Your CPA can work with you to determine which fees you can deduct.

Your CPA Can Help

While mortgage closing costs may seem like a confusing subject, there’s no need to panic. Instead, turn to your local CPA for knowledgeable advice on all your family’s financial concerns.

Copyright 2011 American Institute of Certified Public Accountants.

The Money Management columns are a joint effort of the AICPA and the California Society of CPAs as part of the profession’s nationwide 360 Degrees of Financial Literacy program.