Know the rules, your rights before your mortgage closing

Just about anyone who has purchased or refinanced a home has a mortgage-closing horror story. Unexpected fees. Last-minute surprises. A settlement document that contains more pages than The Brothers Karamazov.

The Department of Housing and Urban Development has embarked on a renewed effort to make the closing process simpler and less costly. An earlier effort to update the rules generated such a buzz saw of opposition that HUD withdrew the changes last year.

This time around, HUD Secretary Alphonso Jackson plans to confer with as many industry and consumer groups as possible, starting with a round table in Washington Thursday. While it won't be possible to satisfy all the constituencies, "We're looking for consensus," Jackson said in an interview. Last time around, he said, "I couldn't find anyone who was with us."

There's already a consensus on one point: The Real Estate Settlement Procedures Act, which governs mortgage closings, is overly complicated and outdated. But there's widespread disagreement on how to fix the problem because so many players have a financial interest in the outcome.

Jackson said he hasn't set a timetable for releasing proposed changes to the rules. "We're going to move very judiciously," he said.

That may improve the chance for reform, but it also means the change could be a long time coming. So if you're planning to buy or refinance a home in the next few months, you'll have to go into the market with the rules that you have, not the rules that you want.

Protecting your interests

To protect your interests, make it clear upfront that you're an informed borrower, says Allen Fishbein, director of housing and credit policy for the Consumer Federation of America. Some closing costs may be negotiable with the seller, lender or closing agent, he says. The box on this page shows price ranges for closing-related costs. While closing costs vary depending on where you live, raise questions if an item is significantly higher than average, Fishbein says.

Other tips for borrowers:

• Shop around. When you apply for a home loan, the lender or mortgage broker is required by law to give you a good-faith estimate of your settlement costs. Trouble is, there's no penalty for low-balling. Many borrowers say their actual costs have no earthly connection to the good-faith estimate.

  Some lenders have tackled the problem by offering flat-rate packages or guaranteeing their estimates of closing costs.

  Ditech.com, a subsidiary of General Motors Acceptance Corp., has offered a $395 flat fee for its mortgage refinancings for several years; last week, it extended the deal to home purchases.

  Bank of America's Mortgage Rewards program waives most closing costs for Bank of America customers.

  ING Direct's Orange Mortgage guarantees its closing costs, says Arkadi Kuhlmann, chief executive of ING Direct USA. If the estimate is too low, "We pick up the difference," he says.

  ABN Amro Mortgage Group allows borrowers who obtain mortgages through its online channel, www.mortgage.com, to lock in closing fees at the same time they lock in the interest rate. The guarantee is also available through its LaSalle Bank and Standard Federal Bank subsidiaries.

  "What customers say they want is simplicity and a guarantee," says Garth Graham, senior vice president of e-commerce.

• Look for ways to save on title insurance. Title insurance protects the lender if there's a dispute over ownership of the property. If the house you're buying was owned by the seller for just a few years, ask the seller's title company for a re-issue rate. The premium will likely be lower. You may also qualify for a re-issue rate if you're refinancing.
• If you're refinancing, go to your existing lender and ask for a streamlined refinancing. These typically require less paperwork, which translates into lower fees. Alternatively, ask your lender if you qualify for loan modification. With these deals, you keep your existing loan and pay your lender a fee in exchange for a reduction in your interest rate.
• Ask to see the HUD-1. This is the official name of your settlement statement, which lists all your actual closing costs and charges. Borrowers have a right to review a draft of this document one day before closing, but hardly anyone ever asks for it. That's a mistake, because when it's time to close, it's usually too late to challenge inflated costs.

For more information, check out A Consumer's Guide to Mortgage Settlement Costs, published by the Federal Reserve Board. It's available at www.federalreserve.gov; click on "Consumer Information."