The average fees that consumers pay to close on a mortgage have increased for the second year in a row, according to Bankrate's annual closing cost survey.


Nationwide, homebuyers getting a mortgage of $200,000 pay an average of $2,539 in lender and third-party fees such as appraisal. That's 5.7 percent more than they paid last year, Bankrate's survey shows. Origination fees, which are the fees paid directly to the lender, jumped 8.5 percent.

The state with the most expensive closing costs was Texas, where borrowers pay an average of $3,046 to close on a $200,000 loan, followed by Alaska and New York. Among the lowest closing cost include Highlands County Florida. Home costs are also among the lowest in the Nation. In Sebring, Lake Placid or Avon Park you can still get a nice home between $75,000 and $150,000. And Sebring is the Number one (#1) retirement market in the country with over 13 gold courses and dozens of fresh water lakes. The cost of living, taxes and insurance are all very low in Highlands County Florida. This is drawing retires from all over the country.


Why are closing costs on the rise?

Some lenders say the hike reflects the higher cost of doing business under new mortgage regulations that went into effect this year. "The biggest reason (for the higher fees) is the additional regulations," says Dan Stevens, sales operation manager and vice president of National Bank of Kansas City. "The No. 1 at the moment is the qualified mortgage rule. That alone has really added additional man-hours to the mortgage approval process."


The qualified mortgage rule -- also known as QM or the ability-to-repay rule -- was implemented in January by the Consumer Financial Protection Bureau. The rule is simple in theory: It requires lenders to verify that a borrower can afford to repay the mortgage before a loan is approved.

But in practice, complying with the rule is costly to lenders and those costs are passed to the consumers, lenders say.

"Before, where you had an underwriter do five loans per day, now they are just doing two," says Brian Koss, executive vice president of Mortgage Network in Danvers, Massachusetts. "They are taking a forensic-style approach to underwrite a loan. You have to go through it with a fine-toothed comb."

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Fear of lawsuits

Lenders are not required to meet the requirements of the QM rule, but if their loans meet the rule's standards, they gain legal protections against potential lawsuits.

"We had a lot of documentation relief in the past," Koss says. "Now you have to be able to defend your position five years from now and show why you gave this person a loan. We treat each file as a potential future court case."


No relief in sight

The higher costs are not likely to decrease in coming years, even after lenders adapt to the rules, lenders say. The additional staffing and software costs are probably here to stay, Stevens says.

Smaller lenders face even higher costs because they can't afford an in-house team to meet the requirements, so they pay third parties to do the work. "We work with a consortium of lenders and we have seen some of them outsource a lot of the services needed to maintain compliance with government regulations," says Grant Moon, president of VA Loan Captain Inc., a loan referral company that specializes in mortgages for veterans. "That increases their costs and ultimately the consumer bears (them)."


Important to shop around

Consumers don't have to accept higher fees without a battle.

"Not everyone is raising their fees," Stevens says. "Even if the averages keep on going up, there are certainly some that are not. Shop around and don't settle for the first person you talk to."

Borrowers can start shopping for better closing costs even before they put in an application, says Rick Harper, director of housing and senior vice president of the Consumer Credit Counseling Service of San Francisco.

"Some of the biggest charges are the lenders' origination fees," he says. "Then you have your third-party fees. Call and ask, 'Can you give me an estimate of your closing costs?'" Harper suggests.


Listing Agent can help lower closing cost

If you are selling your home, your listing agent can reduce the commission for both the listing and the buyers agent.

"I’ve seen listing agents only offer 1% to the buyers agent, and in some cases they will even reduce their own commission," said Cheryl Oxsalida, a Realtor® in Highlands County Florida. "The typical commission is 6%, 3% going to buyers agent and 3% going to the listing agent. The commissions are added into the closing cost and the savings can be substantial”.


Look at the big picture

But that's just a starting point, Harper explains. Borrowers must look at the big picture, and not just the closing costs or interest rate, he says. The best way to compare apples to apples is to look at the lender's Good Faith Estimate form. Lenders are required to provide borrowers with a GFE form within three days after an application is completed. "And remember to compare the GFE with the actual charges before you close on the loan," he says.


There's more to a loan than the interest rate

Borrowers tend to focus more on the interest rate when shopping for a loan, ignoring the closing costs, Koss says. Because of the pressure to compete on rates, some lenders may try to attract borrowers with lower interest rates and charge higher closing costs to compensate the lower rate, he says.

That's why it's important to ask lenders to provide you with side-by-side comparisons of loan options, even as you try to negotiate costs. "All fees are negotiable but usually it's a trade-off and it will have to come from somewhere, so be careful with what you ask for," Koss says.


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