The average fees lenders charge consumers to close on a mortgage have increased over the past year in most states, according to Bankrate’s annual closing cost survey.
A homebuyer getting a $200,000 loan pays an average of about $2,400 in origination and third-party fees such as appraisal, according to this year’s survey. That’s a 6 percent jump compared to last year when the same fees averaged about $2,264.
Most of the increase is tied to fees paid directly to the loan originator. Excluding third-party costs, origination fees alone were up about 8.4 percent compared to last year.
Why are fees up?
The low-mortgage-rate environment has played a role in the rise of closing costs over the past year, says Anthony Sanders, professor of real estate and finance at George Mason University. As historically low rates attracted large waves of refinancers, lenders didn’t have to compete as much for business, Sanders says.
The increased demand for loans has allowed lenders to charge higher fees while they can, he says.
“Banks realize that rates are going to go up and are trying to capture fees early on,” he says. “They know when rates go up, loan applications plunge, so they are trying to generate more earnings on anticipation of lower application volume and lower profits.”
As rates climb and fewer homeowners are able to save money by refinancing their mortgages, loan originators will likely reduce origination fees as an incentive to attract more borrowers, he says.
“They will have to lower the closing costs where it’s possible to attract more business,” Sanders says.
New rules cost banks
Many lenders say there’s been upward pressure on closing costs partly because they have been facing increased expenses to implement a series of new mortgage regulations imposed by the Consumer Financial Protection Bureau. Many of these rules go into effect next year, but lenders are gearing up for compliance in advance.
“The cost of compliance is enormous,” says Anders Hostelley, chief production officer at Honolulu HomeLoans. “As a mortgage banker, we are having to staff up. We just hired another compliance person recently.”
Hawaii most expensive state
Hawaii ranked as the state with the highest closing costs in the 2013 survey, with fees totaling $2,919. It ranked second in most-expensive lender fees and first for third-party fees.
Closing costs are so expensive in Hawaii partly because of the limited supply of mortgage professionals and third-party vendors, such as appraisers, available to work on the islands, Hostelley says.
“We are always looking at our competitors, trying to recruit someone away, and that drives up the average cost per loan,” he says. Training new professionals or recruiting them from out of state is an option, but the costs aren’t necessarily lower, he says.
“The average salary that we have to pay is still pretty high compared to what we would have to pay on the mainland,” he says.
Hawaii, which has a population that’s about half that of Chicago, has a 4.7 percent unemployment rate — well below the national average.
California has highest lender fees
The second-most-expensive state for closing costs in this year’s survey was Alaska, followed by South Carolina and California, which has the highest origination fees in the nation. The survey does not include title insurance, escrow and local taxes.
The least expensive states to get a mortgage were Wisconsin, Missouri and Kansas.
Shop for lower closing costs
It’s unlikely that you will move to Wisconsin to pay low closing costs, but you can shop around and compare fees from different loan originators to make sure you get the best deal in your area.
When applying for a loan, borrowers should make sure the lender gives them a form called the Good Faith Estimate, or GFE, says Alex Jacobs, executive vice president and national production manager for SunTrust Mortgage.
The government-mandated form provides borrowers with an itemized summary of the loan terms, including origination fees, which are the fees paid to the lender to originate the loan.
“The Good Faith Estimate is probably the best way to compare costs,” Jacobs says. “All lenders are required to provide that to the borrower.”
Some lenders may offer you lower closing costs but charge you a higher interest rate and vice versa. One useful tool to compare apples to apples is to look at the APR on the form, or the annual percentage rate. The APR incorporates closing costs into the interest rate you are quoted to show you the annual cost of the loan, Jacobs says.
“I encourage consumers to look closely at their Good Faith Estimate,” he says.