Office of Loan Programs

A Clear View Of Closing Costs
Jay Valancy
September 2003

The recent refinancing boom, fueled by historically low interest rates, has once again focused attention on the closing costs charged by lenders. The drive to clear the confusion surrounding the widely varying amount of closing costs charged by lenders, as well as their timing and unpredictability, is spearheaded by Housing and Urban Development Secretary Mel Martinez’s personal experience of refinancing his home.

The 1974 Real Estate Settlement Procedures Act (commonly known as RESPA) was enacted to simplify closing costs on mortgages and make comparison-shopping among lenders easy and straightforward. The law, however, did not clearly specify which fees could be included and which must be included. The initial estimate presented at the time of loan application was defined as a “good faith” estimate, and not a binding agreement; therefore, a lender could easily add on other fees at loan closing.

Locking fees, for example, may or may not be included in a good faith estimate. If they are, the amount of the fee will probably change depending on the length of the locking period (logically, it costs more to lock for a longer term than a shorter term). Other fees sometimes added by lenders include such nebulous charges for “processing”, “underwriting”, or “document preparation”.

The amount of fees charged by a lender is significant because it effects the calculation of the Annual Percentage Rate (APR). Without an accurate and complete listing of the fees charged by the lender, it is impossible to accurately compare the APR of different loan products.

Secretary Martinez hopes to correct this discrepancy by requiring lenders to prepare a good faith estimate that is comprehensive and binding. Until his proposal is adopted (assuming it is adopted), the real estate loan shopper can only make a reasonable guess at comparing fixed rate loans from different vendors.

So, how does this relate to a borrower with a MOP loan or an applicant considering a MOP? As the MOP is an adjustable rate loan, it is impossible to accurately compare it to any fixed rate loan. The biggest unknown - what will the interest rate be after the first year - makes comparisons to fixed rate loans an educated guess.

The costs, however, are another story. The only fees paid by the MOP borrower are those charged by escrow/title companies and the appraisal. The University absorbs the cost of the credit report, tax contract and flood certification. In addition, there are no “miscellaneous” or undefined charges frequently assessed by other lenders such as fees for processing, underwriting, or preparing loan documents.

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