Understanding Mortgage Fees and Closing Costs
The amount you borrow to actually buy your house is one thing; the fees required to close the transaction are quite another, and they amount to from 3 to 5 percent of your overall mortgage.
At the real estate closing, you will be given a stack of paperwork that shows the loan fees line-by-line. (You should already have seen these in your Good Faith Estimate, but they might vary.) The fees below are what is generally required, but every buyer will not pay every fee listed. For example, maybe you worked a deal with the seller to pick up part of the closing costs. And there are many geographic differences. Finally, all lenders do not charge every fee shown.
Commissions: Payment for the work real estate agents have done. Traditionally it is 6% split between buyer and seller agents; usually 3% to buyer's agent, 3% to seller's agent. The seller usually pays these. Note: These costs are not included in your lender's Good Faith Estimate.
General loan fees
Application fee: An application fee is a fee to reimburse the lender for internal costs associated with initiating the application process, usually under $300.
Appraisal fee: The lender hires an independent appraiser to determine whether the property is worth the sales price you've offered for it. Expect $200-$500. It can be higher or lower, depending on the size of the property and appraisal fees in your area.
Assumption fee: Buyers sometimes take over (assume) the seller's existing mortgage. If so, the lender may charge a variable fee.
Credit report fee: Covers obtaining a credit report to determine whether you are an acceptable credit risk. Also called a "credit check fee," it averages about $25 per credit report checked. although some borrowers have paid three times more.
Interest: Most lenders require the buyer to pay the interest that will accrue on their loan from the date of settlement to the first monthly mortgage payment due date.
Mortgage insurance application fee: When the down payment is less than 20 percent of the purchase price, you are required to carry Private Mortgage Insurance, PMI, to protect the lender should you default on your loan. The lender charges a variable fee to process the application.
Lender credit: A lender will offer a borrower a lender credit to cover origination and/or fees.
Lender's inspection fee: If you are building a new home or buying a home that's under construction, the lender may charge an inspection fee, usually under $100. This pays for an inspection by the lender or outside inspector of your house or property.
Lender's attorney fee: About $400. If a lender involves an attorney in a transaction for any reason, the buyer pays.
Loan origination fee: Fee for establishing a new loan. It is paid to the lender for his or her services in originating the loan. The fee usually varies from 0.5% (half a point) to 2% (two points) of the loan amount.
Loan discount points: Refers to a one-time charge imposed by the lender or mortgage broker to lower the interest rate and therefore the monthly mortgage payment. The more points paid up front, the lower the interest rate. The loan discount is also called "point" or "discount point." Note that the interest rate does not drop by one percent per point.
Mortgage broker fee: Paid to a mortgage broker, typically in a commission based upon the amount borrowed, in return for finding the mortgage.
Mortgage insurance premium: Some lenders require borrowers to pay their first year's mortgage insurance premium up front. Other lenders ask for a lump sum insurance premium payment at closing that covers the life of the loan.
Process fee: Charged by the lender to cover costs associated with the processing and closing of a mortgage loan.
Reserve account funds: Your monthly mortgage payments are likely to include a pro-rated amount to cover payments for property taxes and homeowners insurance. This money is held in a "reserve" or "escrow" account by the lender who makes the payments for you. At closing, your lender may require you to pony up advance payments just to be sure the reserve fund has enough money to pay the bills.
Tax-related service fee: Paid to set up a service which identifies the payment due date of local taxes for the servicer of the loan.
Underwriting fee: Covers the final analysis and approval of the mortgage; often the lender's cost to the investor that will subsequently purchase the loan.
Wire transfer fee: Covers the cost of wiring the money around, which is usually done by escrow.
Insurance and taxes
Annual assessments: If you will have annual assessments made by your condominium or homeowners association, you will have to pay two months' worth up front.
Flood insurance premium: Lenders may require flood insurance, with the premium paid at closing, depending on the property location.
Homeowners insurance premium: A homeowners insurance policy protects the lender (as well as the owner) against loss of the house from fire, wind, or other natural disasters. Usually the buyer pays some of the premium payment at closing.
Taxes: Buyers pay two months' worth of city property taxes and two months of county property taxes at closing.
Attorney fees: Varies, but could be $500 to $1000 or more. In some parts of the country an attorney, not a title company, handles closing, and sometimes an attorney is hired by the lender to review certain documents.
Notary fees: Pays for the notary public who witnesses that the signatures on closing documents are made by the people named in them.
Title insurance fees: Average is $350, but could be as high as one percent of the loan. Title insurance is a policy that protects the owner and/or lender by guaranteeing the title to the property is clear.
Title search: About $200. A search is done to make sure there aren't any unpaid mortgages or tax liens on the property.
Government recording and transfer charges
Courier fee: Charged if a courier picks up and delivers documents.
Lead-based paint inspection: Covers the cost of evaluating lead-based paint risk.
Pest inspection: Depending on location, a termite or other pest inspection may be required.
Radon test: Covers the cost of testing for the presence of radon gas, which can be a problem in some parts of the country.
Recording fees: Average about $100. This covers getting the sale recorded in the public record.
Survey: About $1000 for a survey of the property boundaries.
Transfer taxes: This is a fee, usually collected by the state, for transferring the title of the property within a certain jurisdiction. The fee varies.