Average mortgage closing costs have jumped 40 percent in Illinois this year, according to an online survey by personal finance company Bankrate Inc.
Let’s look at it:
Lenders are now required to provide an estimate of title and closing fees within 10 percent of what the final cost will be, or they’ll risk penalties. The regulations require more labor in getting a loan together.
Ah. Lenders are now required to actually tell you how much the closing costs will be, instead of lying about it up front and then hosing you at the closing table, or worse, hiding the costs via some sort of rate-jack or other tricky gimmick?
How does this increase costs?
What’s really happened with the “new regulations” is that:
It is no longer legal to screw people with “surprises” that are wildly beyond the so-called “good-faith” estimates given when you apply.
It is also no longer legal to roll closing costs in a hidden fashion via interest-rate and other tricks, including prepayment penalties. If it’s a cost it has to be shown as a cost – so people can evaluate what you’re doing, and what’s in their best interest.
That is, now the actual funding costs are visible to you. This is then bleated about as an “increase”, when it really is just exposing costs you paid before, but which were cleverly hidden from your view in many cases, and in fact were grossly-inflated in most.
When a processing cost is hidden from you via these tricks it can be marked up by ridiculous amounts. A $1,000 fee that is hidden via a 25 basis point increase in the cost of your loan looks cheaper to you, but in point of fact on a $200,000 mortgage is it?
Let’s assume the “no hidden costs” loan is at 4.5%, $200,000, for 30 years. Your P&I is $1,009.58.
Now let’s presume you “roll” that $1,000 closing cost “increase” in the referenced article into the loan “silently”, and pay 4.75% instead. Your P&I is now $1039.18.
That’s about $30 a month. Looks like a good deal, right?
But is it really?
The average home is occupied for about 7 years (actual duration, not contracted duration) – this is why the mortgage industry tends to hedge using the 10 year treasury, and not the 30. But you pay $360 a year for the privilege of hiding that $1,000. In less than three years you’ve paid it. In seven years you pay it more than twice.
Now just who got hosed here, assuming you intend to stay in the house for more than three years? Gee, I wonder….. NOT!
Part of the problem with the housing bubble was driven by these tricks. Americans were rooked into taking loans they could not afford via these tricks, which were poorly-understood (if understood at all) yet which were extremely profitable (for the mortgage issuers and bankers, of course.) Now that these games have to stop suddenly we have bankers claiming there has been a “huge increase” in funding costs.
Sorry folks, but exposing a hidden fee does not a cost increase make. It simply brings into the sunlight the financial rape you were being subjected to without your knowledge in the past.