Are lenders’ “junk fees” pushing the high cost of closing on a home even higher? The federal government thinks so.
The Consumer Financial Protection Bureau (CFPB) says fees need to be more transparent, understandable, and reasonable.
Why are the fees charged? Are they really “junk”? Do borrowers get a say in what they pay? Let’s take a look.
What Closing Costs Count as “Junk Fees”?
Where a mortgage is involved, a borrower has to pay a variety of fees. Charges sometimes talked about as “junk fees” are usually listed on the closing statement. Before the borrower may take the keys to that new home, all this stuff happens:
- Title companies charge buyers at closing for their title insurance policies. A lender’s title policy covers only the lender for possible, later-uncovered title defects. The CFPB bluntly says: “The amount that borrowers pay for lender’s title insurance is often much greater than the risk.” Surprise!
- Appraisals (and the appraiser’s charges) are part of the loan process. Some lenders offer loans with free appraisals. And yet, critics describe “free appraisal” as one of many marketing phrases. It amounts to a lure, critics say, to get applicants through the door.
- Credit reporting companies’ charges get stirred into the mortgage, too. Borrowers get charged for the multiple credit reports ordered by the mortgage company. Three large companies dominate the credit reporting sector, so these firms have generally escaped the kind of competitive pressure that most corporations face to keep prices down.
And even as they’ve been hiking fees, nationwide credit reporting companies made over $1.3 billion annually, the agency points out.
- Lenders issue fees for loan origination and other administrative items.
- Borrowers might buy discount points to get a lower rate over the term of a loan. Little do most buyers know that points may actually increase mortgage costs, the CFPB explains, and with the rates elevated, borrowers have been paying more for points — now typically adding up to $2,000+.
- Borrowers with limited funds pay more. They pay higher interest rates, and many are forking over private mortgage insurance (PMI) premiums every month. (Those PMI premiums were cut for some loans last year, but they continue to weigh heavily on first-time buyers and borrowers with modest incomes.)
Across the board, says the CFPB, costs are on the rise.
Closing Costs Can Sideline Borrowers With Modest Incomes.
And they do. Some people trying to get a toehold on today’s homeownership ladder find out they’ll pay more in closing costs than on their down payments! Fee payers are being hit up when they’re vulnerable — after all, they’re focused on the deal going through, and rarely counting the nickels and dimes.
So, buyers might not focus specifically on the actual amounts of the fees, even though they know they’re paying them. The bulk of closing costs are blended into the mortgage itself, pushing a household’s monthly mortgage expenses upward.
The typical (median) mortgage holder is paying nearly $6,000 in these additional costs and fees. Wow. These charges do add up. This figure does not count the commissions for the seller and buyer agents. Even if the seller pays commissions, a borrower ultimately covers those costs, too — through the price paid to the seller for the home.
Sure, borrowers can pay the closing costs upfront. But that competes with the down payment they have to kick in. And sure, borrowers may shop for a no-closing-cost mortgage. Or they might seek a mortgage company that gives a credit to cover closing costs. But the normal fees still exist in these attractive-sounding loans that some companies market. They’re blended into the loan or its interest rate. It’s a no-free-lunch situation, and the menu is getting pricey.
Fed-Up Consumer Watchdog Seeks Owners’ and Renters’ Stories.
What’s your experience with closing costs? Your input can help shape housing policy. see the next section of this column for the link to comment. The Consumer Financial Protection Bureau is interested in customer comments about:
- Trying to refinance a mortgage to grab a lower interest rate when rates go down.
- Struggling to make monthly mortgage payments.
- Submitting complaints involving a lender or mortgage specialist.
- Dealing with high lending fees — either for loans to pay rent or to buy a home.
- Using fee-heavy rent payment platforms online.
The CFPB wants public opinion on all of the above — whether the input is general, or specific to your household’s experience.
What Will the CFPB Do With What They Learn?
The CFPB will proceed as needed to issue “rules and guidance” that improve borrowers’ experiences with closing fees. As an independent agency of the federal government, the CFPB is entrusted with protecting consumers of financial products, like loans.
“We will also continue,” says the agency, “to hold companies accountable when they violate the law.” We as consumers can influence the agency’s to-do list.
Interested in sharing thoughts about your mortgage experiences? There are two types of input you can send in:
- If you want to submit input, you can easily do this online. The administrators there are interested in both positive and negative stories from applicants and borrowers.
- There’s a separate webpage to report a problem with your mortgage or closing costs. You can submit a complaint with the CFPB — for example, if you’ve faced a questionable or ambiguous “transaction fee” or “administrative fee” on your final statement at closing.
In general, the CFPB is the agency to contact for borrowers charged inappropriately by mortgage companies or other professionals involved in a home sale transaction.
Meanwhile, the CFPB Gives Borrowers a Few Survival Tips.
Up for saving hundreds, even thousands, of dollars at closing? The Consumer Financial Protection Bureau thinks many borrowers can. It offers a few pointers for hopeful deed holders:
- Compare the local average to your closing bill, and raise questions if you’ve been asked to pay above what is typically expected.
- Know that slowing things down for clarifications is OK. Adrenaline or just plain feeling rushed to sign documents can make good decisions difficult.
Do you believe some of the fees you face are hard to understand or plainly unfair? If so, you do have the prerogative to find a company that’s “more upfront and transparent,” says the CFPB. After all, this is a major purchase most people only make once in a decade or more.
Mainly, it’s best to keep your antennae up and ask questions.
“Reaching the closing stages of a deal may feel like the end of a marathon,” writes Tom Higgins for Kiplinger. The pressure is on to agree to the fees, which seem like hurdles to jump to win those precious house keys.
The buyer’s push to get to the finish line is understandable. It’s especially so, for first-timers who sweat every phone call with the mortgage company. Still, Higgins adds: Think clearly.
Supporting References
Julie Margetta Morgan for the Consumer Financial Protection Bureau: Junk Fees Are Driving Up Housing Costs. The CFPB Wants to Hear From You (blog entry for Mar. 8, 2024; internal references omitted).
Tom Higgins for Kiplinger.com (copyright by Future US, Inc.): Beware “Junk Fees” When Buying a Home (updated Sep. 22, 2023).
And as linked.
More on topics: Closing on a home fast, Upfront fee structure for conventional mortgages
Photo credits: Nick Youngson via Pix4free/Picpedia (CC-BY-SA 3.0; cropped), and Pixabay, via Pexels/Canva.