Let's cut to the chase. Obtaining a mortgage to buy a home, or to refinance one you already own, is not cheap. No two ways about it, acquiring property is going to cost you some bucks. However, knowing ahead of time what fees lenders charge — including both upfront and later in the transaction — can help ensure you're getting a fair and competitive loan offer.
There are fees you'll need to pay upfront before the loan transaction commences. This will vary from lender, bank or loan broker, but there are three main fees that lending companies may charge before a loan closes.
1. Appraisal Fee
This fee is probably the most common upfront cost across the board, whether you're working with a mortgage lender, broker, bank or credit union. Nearly every single loan product these days, other than the Home Affordable Refinance Program 2, requires an appraisal (though that may require an appraisal, too). An appraisal will determine the value of the property, and more importantly the loan-to-value, which is a critical factor in determining cost that can't be known without a valuation. Additionally, the lender requires the appraisal to be paid upfront because if the loan does not move forward, the appraiser still needs to be compensated.
Expect an appraisal for a primary home transaction to be approximately $400-$500. Investment property transactions typically cost an extra $200-$300 because the appraiser has to create an additional operating income statement and rental market analysis for the property. This fee is called POC — paid outside of closing — which reflects an accounting credit when you receive mortgage loan disclosures noting that the fee is already paid for.
2. Lock Fee
When a lender locks your mortgage interest rate, they effectively are setting aside whatever your loan amount is at a specific interest rate and cost customized to you. If interest rates rise, the lender loses money. For example, if you are locked at 3.875% on a 30-year fixed rate mortgage, and rates rise to 4.125%, your loan becomes less attractive to the end investor. However, a lock fee helps support the lender's profitability.
3. Application Fee
By collecting a fee upfront, the mortgage company can then take this application fee and pay the appraiser. It's quite common that some mortgage providers might call an application fee and appraisal fee the same thing, with the same exact meaning that the appraiser needs to get paid and shouldn't have to wait until close of escrow for services rendered.
Fees Due at Closing
Mortgage loan fees can be paid for at close whether financed in the loan amount or paid for in cash at escrow closing.
4. Origination Fee
This is the margin the lender earns by taking a loan application, arranging the loan, procuring funds and subsequently closing. This fee varies across the board, but it typically runs more than $1,000. Also included in this amount: any processing fee, underwriting fee or lender fee. If working with a mortgage broker, the origination fee is also any percentage of compensation you agree to pay to that mortgage professional for arranging financing for you.
5. Discount Fee
Traditionally, a discount fee is an upfront fee you can pay in order to obtain a lower interest rate that will give you a lower monthly payment. Your credit score, loan type, occupancy, down payment/equity and loan size could all affect your rate and any discount fee/points. Discount fees can be anywhere from as little as one dollar to several thousand dollars, depending on the rate and scenario you have set up with your mortgage provider. Additionally, you can choose negative fee/points, which is also known as a lender credit.
6. Lender Credit
Let's say, based on the day you choose to lock in your interest rate, there is no cost with that particular interest rate, but actually a credit amount. This credit amount is a direct credit in real dollars toward your closing costs, reducing your fees when refinancing or reducing your cash to close when purchasing a home.
For a lender credit, you'll pay a slightly higher-than-market rate based on your loan and credit scenario – more than you would be if you were paying points, or paying none.
A Word on Loan Disclosures
Keep in mind that a loan disclosure, which shows your total closing figures, is an estimate.
When you're buying a home, one of the main pieces of information a mortgage provider needs from you is the address of the property you plan to purchase. If you are pre-approved for a mortgage, but have yet to ink a purchase contract, your lender should have given you a pre-approval letter. Only once all parties have signed the purchase contract for an identified property is the lender required to send you loan disclosures within three days of creating an application.
When refinancing, an address, as well as job, income and loan amount numbers can be estimated at this time, and loan disclosures are sent within the three-day window. A word to the wise: Initial loan disclosures during a proposed refinance are subject to change, as is the interest rate and any associated discount costs, based on the appraised value once it comes in.
Your credit plays a big part in how much you pay for your mortgage, which affects how much house you can afford, as a better credit score can get you a lower interest rate. Before you start shopping for a home, you can check your credit to see where you stand and to deal with any problems or errors with your credit. You can see your free annual credit reports from each of the major credit reporting agencies through AnnualCreditReport.com. You can also keep an eye out for changes by getting your free credit report summary, updated monthly on Credit.com.
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