The Wall Street Journal-20080214-Fiscally Fit- Negotiating Refinancing Fees Terri-s Brother Gets Ready to Refinance- How to Avoid Getting Saddled With Fees- Online edition

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Fiscally Fit: Negotiating Refinancing Fees Terri's Brother Gets Ready to Refinance; How to Avoid Getting Saddled With Fees; Online edition

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My younger brother Joe and his wife Rhonda are planning on refinancing their mortgage. Since rates have fallen since they took out their 30-year fixed-rate mortgage three years ago and their credit scores have improved, they hope to qualify for a better deal this time around.

When Joe and Rhonda purchased their first home, their credit history was spotty and they didn't qualify for the best mortgage rates. To qualify for the rate they did get, they had to use the bulk of their savings to pay the down payment. With money tight, they asked to have their closing costs rolled into the loan -- and because they weren't literally writing a check to pay those costs, they didn't pay too much attention to the list of charges. Now Joe's convinced they were charged too much, and wishes they'd asked more questions. He doesn't want to make the same mistake this time, and knows they should negotiate with the lender on fees. The problem is, he doesn't know which fees are set in stone and which can be reduced or waived.

My husband Gerry can relate. When he bought his first house in 1992 he had no idea he could argue about some of the fees he'd be asked to pay. Like a lot of first-time home buyers, Gerry was intimidated by the loan process and made the mistake of relying on his mortgage broker to look out for his best interests. On closing day, he had to scramble to bring an additional $1,700 to the table, $500 of which went to pay "unforeseen costs" the mortgage provider said had arisen in processing his loan. Gerry learned his lesson: When we refinanced the mortgage in 2000, he looked over the fees carefully and questioned all costs, so there were no surprises on closing day.

To help Joe and Rhonda do the same, I decided to walk them through the fees borrowers are generally obligated to pay, and some of the junk fees that lenders charge to boost their profits. I also decided I'd coach them how to respond when mortgage providers try to pad the bill.

As borrowers, we're constantly told to compare fees when shopping for loans, but we're seldom told how to do it. And it's confusing: How much consumers pay in closing costs varies from state to state and lender to lender. It also depends on the borrower -- a loan applicant with a good credit score generally will pay lower fees than a borrower with bad credit because the lender may be required to do more legwork to qualify the borrower for a loan.

That's why it's important for Joe and Rhonda to know their credit scores -- and find any errors that have crept into the reports -- before beginning the loan process. If they don't discover errors until after they've applied for the loan, lenders must "re-score" the reports by working with credit-reporting agencies to expedite corrections. Lenders may charge up to $50 to fix an incorrect entry on each credit report.

To avoid paying these costs, Joe and Rhonda should get copies of their credit reports at annualcreditreport.com and clear up any mistakes. (Each homeowner is entitled to one free credit report every year from each of the big three credit-reporting agencies, Equifax, Experian and TransUnion.)

To obtain their individual credit scores, they'd typically have to buy each individually from the three major credit-reporting companies or at MyFico.com. But you can obtain scores for free by signing up for trial subscriptions at credit-report monitoring services that offer access to credit scores. (Just remember to cancel your subscription before the end of the trial period to avoid paying ongoing monthly fees.) You can find a list of credit-monitoring services offering free trial subscriptions here.

Once Joe and Rhonda have checked their credit reports, they can get started comparison-shopping rates and lender fees on refinancing offers.

Though mortgage rates have come down -- and competition among lenders has heated up -- closing costs are still climbing. An annual study by Bankrate.com found the national average for closing costs on a $200,000 mortgage was $3,681 in 2007, up from $3,024 a year earlier. The average for Pennsylvania, where Joe and Rhonda live, was a whopping $8,464 -- largely due to hefty government fees and taxes. (Find your state's average closing costs here.)

Joe was interested in some of the low-cost, flat-fee refinancing ads he's heard. But what these ads don't mention is that the low upfront fees come with higher rates. And these ads rush through warnings about third-party costs for appraisals, surveys, title searches and the like -- which can add thousands of dollars to the final bill.

Once Joe and Rhonda have shopped for loans and found a lender with competitive rates, it's time to compare fees. Most mortgage companies and lenders have lender cost-estimates on their Web sites. (If they don't, call the 800 number and ask for a list of estimated closing costs.)

Once Joe and Rhonda choose a lender and start the application process, the lender will have three working days to get them a Good Faith Estimate (GFE), which provides an estimate of all the fees lenders and third-parties will charge. (Find a sample GFE here from mortgage-data provider HSH Associates.)

GFE in hand, let's look at some ways closing costs can creep up, and how to knock them back down:

Lender fees. Generally, the fees that are most negotiable are lender's fees. You can find lender fees by looking at the numerical codes next to the fees on the GFE. Lender fees generally appear in the 800 range of those codes, and include such things as loan-origination fees, administrative costs, wire-transfer costs and other clerical fees.

The loan-origination fee is what lenders charge for their services. Typically, lenders charge an origination fee of one "point," or 1% of the loan amount. (This would be $2,000 on a $200,000 loan.) Generally lenders won't budge on origination fees for new customers -- such fees cover the bulk of their costs. But check with your own mortgage company first before looking elsewhere for better deals: Long-time customers in good standing may find their current mortgage lender willing to reduce or even waive lender costs to avoid losing your business.

Administrative fees over and above that one point -- including document-preparation fees, processing fees, wire-transfer and courier fees -- are simply padding the bill. Demand that the mortgage company cover those costs.

Other upfront fees charged by lenders include application fees and commitment fees. Borrowers with good credit, solid finances and substantial equity should ask that these fees be waived, or credited toward their closing costs.

A few lenders still charge rate-lock fees to guarantee the rate quoted to the borrower for a period of time, typically 60 to 90 days. But many lenders offer rate locks free and some even offer free rate "float downs" in case rates decline during the lock-in period. If you're a well-qualified borrower, don't be afraid to ask that these fees be reduced or waived.

Credit-report fees are charged for obtaining your credit history so the lender can determine your creditworthiness. These fees averaged about $12.52 in 2007, according to the Bankrate survey. (Couples pay more than individual borrowers, obviously.) Sounds reasonable, but big lenders generally have bulk-purchase agreements with credit-reporting companies that allow them to pull an individual credit report for less than 50 cents. Ask the lender to eat that cost.

Discount points. Discount points are upfront fees you pay to lower your mortgage rate. Generally, paying points isn't worth it unless you plan on staying in the home for seven years or more. Why? Because depending on the interest rate and size of your loan, it may take that long to recoup the upfront fee in interest savings. This calculator can help determine whether paying points makes sense.

Third-party costs. There's little wiggle room in third-party costs, which include an appraisal, pest inspection, survey, underwriter services and attorney fees. And then there are taxes and government document-recording fees. Don't waste time trying to play hardball here.

On the other hand, you may be able to maneuver around some third- party costs. Lenders typically ask that you pay for a new title search. But if you purchased your home within the last five years, contact your title-search company and ask if you can have your title- insurance documents reissued. The savings can be as much as half the cost of a new search, or an average of $905 for title-search work and insurance, according to the Bankrate survey.

Lenders often require first-time homebuyers to put money into an escrow account to pay property taxes and homeowners insurance. Borrowers with good credit, steady income and significant equity, like Joe and Rhonda, should ask for this requirement to be waived, and pay those costs on their own. Doing so will eliminate the "tax-service" fee charged for managing your property taxes (check the GFE to make sure you're not charged). Joe and Rhonda also may save money by comparison-shopping for homeowners insurance at Web sites such as InsWeb.com and NetQuote.com. (Find more ways to save on homeowners- insurance costs here.)

If you're allowed to forego an escrow account, or if you get your own homeowners insurance or title insurance, the mortgage company may try and charge you a "waiver fee" -- yes, some companies will want you to pay for work they don't do. These are bogus charges -- refuse to pay them.

Closing the deal. By law, at least 24 hours before the closing lenders must give you a HUD-1 form (see a sample copy here) as the final accounting of all fees charged to complete your loan. Joe and Rhonda should get a copy of the HUD the day before the closing and compare it to their initial GFE. They should question any new fees and/or dispute questionable charges as soon as possible, so they don't feel pressured to cave in and write a check at the closing.

Mortgage providers often explain away junk fees tacked on at the last minute by claiming that the loan "took more work to approve than we thought it would," says Anthony Kirlew, founder of Consumers Advantage Mortgage, a mortgage broker. Your credit score is another common source of last-minute fees. "They'll claim they had to do extra work to get the loan approved because of your bad credit score, when many times the credit score isn't bad in the first place," Mr. Kirlew says.

The best response to either claim is to refuse to close the deal unless the charges are removed, Mr. Kirlew says. (Having copies of your credit reports handy for disputes also helps.)

In the end, Joe and Rhonda should be able to keep fees to a minimum as long as they stand firm and refuse to be intimidated. And Joe has an advantage here: At six-foot-seven, he can be quite intimidating himself!

How are you at negotiating lender fees? Do you have some tips or advice to share? Share your experiences with me at [email protected], and then come you're your fellow readers in a discussion about negotiating lender fees.

Write to me at [email protected].