Shopping for a mortgage would be a breeze if borrowers paid only an interest rate and lenders paid for everything else, embedding their expenses in the rate.
The reality is just the opposite: Not only do lenders impose fees of various sorts, but a large number of other players will have their hands in your pocket before you land a mortgage.
The best way for borrowers to navigate this minefield is to identify at the outset the charges that are “shopable” and those that aren’t. Don’t confuse “shopable” with “negotiable.”
A service is shopable if different providers quote different prices, but that does not imply that any of them will negotiate their price. They might or they might not. In many cases, services are shopable, but not negotiable.
Shopping occurs before the borrower has chosen the service provider. It is the only point in a long process at which the borrower is in full control. The service is shopable because the service provider wants to be chosen.
In contrast, negotiations occur (if they occur) after the borrower is at least partly committed to the service provider. Backing out is costly to the borrower, and the further along he is in the process, the higher the cost — and the less likely it is that the service provider will negotiate.
Lender fees: There are many, but don’t get distracted by what they are called or what they are for. The only thing that matters is the total amount at a specified interest rate. It is item A on Page 2 of the new Good Faith Estimate (GFE), but you won’t receive that until after you have applied for the loan.
Lender title policy: You are required to purchase a title insurance policy that will cover the lender for the amount of the loan. But you need not buy this policy from the title agency recommended by your REALTOR® or lender. Title insurance can be shopped at EntitleDirect.com and other online providers.
Note that the agent writing the title policy will often be providing the closing services as well, and the focus of the pricing is the sum of the two charges. That should be your focus as well. Shop the sum of the title policy, the closing services and also an owner’s title policy if you elect to buy one.
Closing services: These services are provided by the title agent in title agent states, and by an attorney in attorney-preference states, but that should not affect your shopping strategy of combining the two. The GFE combines the two into “Title Services and Lender’s Title Insurance”.
Owner’s title policy: Because the lender’s policy only covers the amount of the loan, title insurers offer an optional add-on that covers the remainder of your exposure. For example, if you pay $200,000 for a home and take a $160,000 mortgage, the lender’s policy covers title-related losses up to $160,000. To protect $200,000 you have to buy an owner’s policy which is available for an additional premium.
The risk that a title claim against your property will arise and require an owner’s policy to protect you in full is very small. If you want an owner’s policy, you should shop for the complete package covering the lender policy, closing services and owner policy.
Homeowners Insurance: You are required to have a homeowners policy that protects your home against fire and most hazards other than floods. You should have such a policy, even if it were not required. Homeowners insurance is easy to shop for online, at Netquote.com and other sites.
Flood Insurance: If your home is on a flood plain, the definitions of which can change over time, you will be required to purchase flood insurance.
If you don’t know that your house is on a flood plain, you will receive the bad news in the appraisal. You can shop for flood insurance at the same time as you shop for homeowners insurance, since the companies that offer one also offer the other.
Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania.
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