Taking the mystery out of mortgage costs
No one likes surprise costs or hidden fees. That’s why your lender wants you to know exactly what goes into the price of your home loan so you know what you will have to pay both upfront and on an ongoing basis.
This article describes the major costs associated with your home loan, which are itemized on your Loan Estimate. Within three days of taking your loan application, Your lender will provide you with a Loan Estimate, which will give you a good idea of the total amount you will pay at the time of the closing, as well as an estimate of your mortgage payments and monthly costs. Of course, your mortgage banker will also be available to answer any questions you have.
The costs of a home loan can be divided into two categories: the items that are controlled by the lender, and the items that are controlled by third parties. The total of all of these items is what you will be asked to pay at the time of the loan closing.
Fees Set By The Lender
When comparing various home loan offers, you want to focus on the costs that are controlled by the lender. Every lender has different loan programs and pricing, so it is important to look at all of these costs – not just the quoted interest rate – to help determine which offer is the best deal for you. Here are some of the items whose price is determined by the lender.
- Interest Rate – The interest rate is the cost of borrowing money and is used to calculate your monthly mortgage payment. The higher the interest rate, the higher your monthly payment will be, and vice versa.
- Discount Points – This is an up-front fee that you can choose to pay if you want to reduce the interest rate on your loan. Buying discount points makes sense if you plan to stay in your home a long time, as the money you save on interest payments over the life of your loan will be greater than the one-time fee you pay.
- Origination Charge – This is a fee for processing a mortgage application, pulling credit reports, verifying financial information and creating a loan.
- Rate-lock Fee – If you choose to lock in your interest rate beyond a certain period of time, you may pay a fee at the time of closing.
- Other Fees – Other fees controlled by the lender include a document preparation fee, processing fee, application fee and underwriting fee.
Fees Set By Third-Parties
Other costs included in your home loan are outside your lender’s control. These costs are either established by your state or local government or set by the individual vendors that provide the service. This category also includes prepayments for taxes and insurance. Here is an explanation of these costs.
- Service Charges – A number of service providers will be required to complete the purchase of your home, such as an appraiser to estimate the value of the home you are buying and an inspector to check the condition of the house. For some services, your lender will pick the vendor, and for other services, you can select your own vendor.
- Title Services – Title services consist of two fees:
- one fee is charged by the title agent for determining the rightful ownership of the home you are buying and handling the paperwork for the transaction
- a second fee is charged by a title insurer to protect your lender if it is discovered that there are unpaid liens on your home (this second fee may or may not be required by your lender).
Some states require attorneys to be involved in all real estate transactions, and if this is the case in your state, an attorney’s fee will also be included in the title services charges.
- Government Recording Charges – Every home buyer must pay these charges for the state and local agencies to record the loans and title documents.
- Transfer Taxes – Depending on where you live, your state, county or city may charge a tax when the ownership of a home is transferred.
- Escrow Deposit – At the closing of your home loan, if you decide on or an escrow is required, there will be an initial deposit in your escrow account to pay for future recurring charges on your home, such as property taxes and insurance. You will typically need to pay for the first year of your homeowner’s insurance in full before your home loan closes.
- Daily Interest Charges – This charge covers the amount of interest that you will owe on your home loan from the time your loan closes to the first day of your regular mortgage billing cycle.
- Flood Insurance – This is a form of hazard insurance that is required by lenders to cover properties in flood zones.
Annual Percentage Rate (APR)
There is one other item to know about – the annual percentage rate (APR) – which consists of both lender-controlled costs and third-party costs. The APR reflects the combined cost of the interest rate, the origination charge, discount points and other upfront costs such as lender fees, processing costs, document fees, prepaid mortgage interest and mortgage interest premiums.
Understanding the costs associated with your loan is important, especially when comparing loans from different lenders. While all of these costs are important to consider, your APR is the best way to compare costs of loans across lenders because it most accurately reflects the total cost of the loan.