The Mortgage Guru

Q: I was wondering which, if any, costs of a refinance are negotiable. I am currently in the process of refinancing my mortgage and the loan officer tells me that the funding and review fee has gone up to $495. When we bought our home a few years ago, that fee was only about $250. Why are the fees so high these days?

A: Many mortgage customers think they are being gouged by “junk fees” such as processing, underwriting and document preparation fees when they close a loan. In fact, I felt the same way when I bought my first home. But now that I have run a mortgage company for many years, I can honestly say that in most cases those fees are there just to cover the actual administrative expense of processing a mortgage. And in the past few years, those administrative costs have been increasing.

Despite computerization, the mortgage business is highly labor intensive, and much of that labor force is relatively highly paid. Each loan has dozens of details that must be analyzed and verified. And when you’re talking about deals involving hundreds of thousands of dollars, there is absolutely no margin for error.

There is little that the average bank or mortgage company can do to control the increasing administrative costs. Unlike many other businesses, there are no “economies of scale” in the mortgage business. In fact, my experience has been that small mortgage companies are often much more efficient than large banks and mortgage companies because there are fewer sets of hands touching each loan file.

So if in most cases the administrative fees are not simply “junk fees” added onto your loan to increase the lender’s profit, are any of the loan closing costs negotiable? Yes. During the refinance boom that ended last year, most mortgage companies had more business than they could handle so they were not often willing to cut their fees. But now that interest rates have increased somewhat and most homeowners have already refinanced their home loans, most mortgage companies have seen their business drop off dramatically and they may be more willing to negotiate some of their closing costs down.

But be aware that MOST of the closing costs in a mortgage transaction are costs over which the typical loan officer has no control. For example, the appraisal, title, escrow and credit report fees are all paid to third party service providers. These providers set their own fees and the mortgage company passes them on to the borrower. Many mortgage companies also use document preparation services and flood report services. Again, those costs are simply passed on to the borrower. In the case of mortgage brokers like my mortgage company, the wholesale lenders that we deal with typically charge processing and underwriting fees, which we also pass on to our clients.

So what’s left to negotiate? Not much. Typically only the “loan origination fee” and the mortgage company’s own “processing fee.” You can ask if the mortgage company is willing to reduce or waive its processing fee. That would typically save you about $250 to $500, depending on the amount of the company’s processing fee. But always shop around to make sure you are getting a fair deal. The mortgage company that is willing to drop its processing fee may be making up that money by charging you a slightly higher interest rate and/or origination fee.

Also be aware that there is usually a correlation between the loan rates and fees that you pay and the amount of service you receive. Most legitimate mortgage companies offer approximately the same interest rates and loan fees on any given day. A “discount” lender may be willing to do your loan for less, but you may have to suffer through weeks of unreturned phone calls, missed deadlines, etc. In other words, you usually get what you pay for. If you want a rock bottom interest rate, expect the “hassle factor” to increase significantly. Also, I hate to say this, but some loan officers will simply not tell you the truth. They may promise a low rate and fees, but when you get to the closing table to sign the final papers, it’s another story. So, as they used to say on an old TV cop show, “Be careful out there.”