Should mortgage lenders pay for closing costs?by Peter Miller
A number of years ago, then-HUD Secretary Mel Martinez proposed that the way to lower closing costs was to have them be paid by mortgage lenders. Martinez said that consumers could save as much $10 billion a year with his plan.
“Americans spend approximately $50 billion each year on settlement costs,” he said in 2002. “I would guess that most of them did not know how much their mortgage loan would cost them until the eleventh hour, and had little or no opportunity to shop for settlement services. As a result, many homebuyers find the settlement process to be filled with mystery and frustration.”
The idea was that serious savings could accrue if lenders were to purchase settlement services in bulk. The result would be discounts from vendors such as lawyers, settlement agents, title insurance companies and appraisers.
Single package vs. dual package
As an alternative, the industry proposed what was called a “dual package” approach. With the dual package system, a borrower would have a choice between accepting a package of closing services from the lender or from a third-party.
With either the Martinez “single package” system or the “dual package” approach, consumers would be better off because some or all of the savings that resulted from volume discounts would be passed on to them.
The dual package idea always seemed particularly interesting because it would mean that borrowers would shop for mortgage rates and then they would separately shop for a package of closing services. They might choose to have a lender do both the loan and closing or they might get the loan from one source and closing services from another.
Since the Martinez idea was logical and made a great deal of sense, it didn’t go anywhere. After all, saving $10 billion also means companies and individuals aren’t making that $10 billion. Today, the result is we have a system which is needlessly expensive.
Still a way to save
At the very least, you should ask if you can get the “re-issue” rate for your title insurance. This is a discount–often 10 percent, 20 percent or even more–which is given to borrowers when they use the same title insurance company which had previously insured an earlier mortgage for the same property.
For example, the settlement for the new home you’re buying is being conducted by the same attorney, title company or escrow firm that did the title work for the builder. Since they recently did the title work, they know that much of the research has already been conducted and does not need to be replicated.