Mortgages are some of the most complicated loans that you can get, and they include a number of associated fees. While a good lender, mortgage broker, or real estate agent will explain mortgage fees to you before the closing, many borrowers still find themselves surprised at the total cost.
“I was aware of the down payment. At the closing, my eyes went wide, and I had to step out to catch my breath because I hadn’t been aware of the fees.”
Here’s a primer on what they are and whether it’s possible to get them waived. Know what you’re paying for when you buy your house!
Loan origination fees
The loan origination fees are often the largest set of fees you’ll pay on your loan. The total amount of originations fee will vary depending on your lender or broker, but they can range anywhere between 0% and 3% of the loan amount (3% is generally the cap for all “origination” fees on the average mortgage loan).
As a category, any fee charged by and paid to the lender and/or mortgage broker for making or “originating” your loan are considered “origination fees.” While the amounts of all of these fees may be itemized and can vary, the total of them, in aggregate, cannot exceed 3% of the loan amount on most loans.
Some lenders will charge separate, itemized fees, such as funding fees, underwriting fees, and processing fees. Most of these fees will be paid at the time your loan closes, but there are also certain specific origination fees that you may see earlier in the loan process, such as …
With some lenders, you can expect to pay an application fee up to $500 when applying for a mortgage. This fee isn’t refundable because it covers tasks that the lender must complete, whether or not they approve you for a loan.
These administrative expenses could include paying someone to process your paperwork or to research and confirm your answers to questions on the application. But not all lenders charge an application fee, so it’s worth it to shop around.
Rate lock fee
After they have approved your loan, some lenders may require you to pay a rate lock fee. This fee locks in your interest rate for a specified time, which protects you from interest rate increases while you’re home shopping.
It’s a good idea to ask about a rate lock if you expect your home search to take longer than 60 days, or if experts predict that the Federal Reserve might raise rates soon. Some lenders may not charge you a rate lock fee upfront, but then could charge a rate lock fee if you’re unable to find a home and close your loan during the initial lock period and will need an extension to keep your locked rate.
Mortgage broker fee
Mortgage brokers work as a middleperson on your behalf to find you a loan that suits your needs from their network of lenders. They help pull together documents and other information that lenders require to apply for a mortgage, then do the work of shopping around to find loan programs that work for you.
If you choose to use a mortgage broker, the broker will receive a mortgage broker fee. Either you or the lender will pay the mortgage broker, but never both.
The term “points” might be used to describe two different kinds of fees: either “origination points” or discount points.
A “point” is simply a way to describe 1% of the mortgage’s total amount. You may find a lender’s origination fee expressed as “origination points,” or a fee that is usually between 1% and 2% of the loan amount (in other words, one to two points). These origination points would also be included in the 3% fee cap on origination fees that applies to most mortgage loans.
“Discount points,” on the other hand, are prepaid interest; paying them upfront reduces your loan’s interest rate, thus lowering your monthly payment. Most lenders that offer discount points will allow you to pay 1% for one point, which will reduce your mortgage interest rate by around 0.25%.
These discount points, so long as they are paid to actually reduce your rate, are generally not considered an “origination fee” and therefore are excluded from the 3% fee total.
The origination fees charged on your loan can vary widely from lender to lender. Some lenders may charge more in itemized origination fees, but then perhaps will offer lower rates. Other lenders may have slightly higher rates, but then charge lower lender fees. You may find a lender that has slightly higher origination charges, but competitive rates, and the slightly higher fee is justified because the service they provide is excellent. And you may find that using a mortgage broker works best for you so they can shop around on your behalf.
Because the fees and rates that a lender or mortgage broker can charge can vary so widely, it is always a great idea to shop around for the best rate and fee structure that works for you. Never be afraid to ask the licensed loan originator you are working with to explain their fees and rates, and your lender should provide you with a Loan Estimate when requested, so you have a standardized form you can use to compare lenders.
Other fees paid to your lender
There are other fees you’ll have to pay your lender that aren’t directly involved with originating the loan.
If your house closes on the 18th, but your first payment isn’t due until the 30th, interest will still accrue on your loan during that period. You will need to prepay for accrued loan interest at closing.
Government program fees
If you opt for a government-backed loan program, like an FHA or VA loan, you will likely have to pay certain fees connected with these loans at close. For example, FHA loans require an upfront mortgage insurance payment, currently 1.75% of the loan amount. And VA loans include a separate VA funding fee that can vary based on your circumstances.
Upfront private mortgage insurance
Some lenders charge private mortgage insurance, or PMI, upfront. That means you may have to pay all or part of your PMI premium at closing.
This premium purchases the loan’s mortgage insurance for the loan’s lifetime, rather than amortizing it and including it with your monthly mortgage payments.
If you’re taking over a seller’s assumable mortgage, you will have to pay a fee. (It would only be worthwhile to take over an assumable mortgage if it has a lower interest rate than current market rates, in which case the fee would likely be worth the long-term savings.)
Mortgage lenders and mortgage brokers aren’t the only entities involved in issuing a mortgage. There are other players in the game who will also need to be paid for their participation.
In some states, you’ll hire an attorney to look over your closing paperwork or other loan documents. Attorneys typically charge by the hour, which can make this expense hard to predict.
In Massachusetts, buyers pick their attorney, which senior loan officer Philip Ganz, who has 19 years of experience in the Boston area, says leads to wild swings in cost.
Mortgages are secured loans, meaning that there is an asset backing the loan. Your house is the asset that secures your mortgage, and it must have enough value to pay off the loan if the bank had to foreclose. The bank will hire an appraiser during the mortgage approval process to estimate the value of your potential new home, and they pass the appraiser’s fee onto you, the buyer.
Before closing, a title company must perform a title search. This search investigates any possible outstanding claims against the title, which could cause major issues down the road. If someone else had a claim to the home you bought, it could lead to lawsuits as ownership gets hashed out in court.
The title search fee runs around $200, and in addition to it, you will have to purchase lender’s title insurance. This insurance protects the lender’s asset, the home, if someone files a claim against it.
Lender’s title insurance doesn’t protect the buyer, which is why you should also consider owner’s title insurance. An owner’s policy covers items such as mistakes in examining records, errors or omissions in deeds, undisclosed heirs, or forgery related to your home’s title.
Whether it’s a title agent, escrow company, or other settlement agent who is conducting your closing, they will likely charge you fees for settlement, escrow services, closing, and so on. Be prepared to also see notary fees, document prep fees, and other fees connected with the signing of your documents and final closing of your loan.
Transfer taxes, government fees, and recording fees
You will also likely see fees for recording, transfer taxes, or other local government fees attached to the closing of your home.
What fees can you negotiate?
After learning about mortgage fees, many homebuyers’ next question is: How many of these are negotiable? Some fees will not be negotiable, but you can always ask if the lender is willing to waive an application fee or if the mortgage broker will accept a lower commission.
In some markets, you may be able to ask the seller to pay closing costs. Le Baron has seen this work when the buyer increases the offer price by $6,000 in exchange for the seller paying $6,000 of their closing costs.
He warns that the caveat to this approach is that “you may run into appraisal concerns because you’re essentially rolling those costs into the loan.” When you increase the total purchase price, the home still has to pass the appraisal.
Commonly negotiable fees include:
- Application fees
- Loan origination/underwriting fees
- Mortgage rate lock fees
- Mortgage broker’s commission
And even if the lender’s fees are fixed and they aren’t willing to negotiate, remember, you always have the right to shop around and compare fees. Ask each lender to provide you with a Loan Estimate of fees based on your scenario and compare them.
Should you really worry about mortgage fees?
In the long run, mortgage fees are a drop in the bucket when compared to a home’s total cost. If you’re hung up on paying these fees, however, Le Baron advises that you take a step back.
Borrowing money “to purchase a house is not free,” he says. “When purchasing a hard asset like a home, you’re not paying rent any longer, and you’re planning to live there an extended amount of time. You will make up those fees.”
Just make sure that you include them in your homebuying budget!
Header Image Source: (Colton Sturgeon / Unsplash)