Navigating Common Mortgage Fees
What to Expect
These are the charges you'll find in Section A of a Loan Estimate. At Local Mortgage, we keep our lender fees simple. When you work with us, we charge just one $795 administration fee. That's it.
Some lenders have complex fee structures including processing, underwriting, and origination fees. When it comes to these costs, the important thing to understand is that all those fees are paid to the lender, regardless of what the fee is called. If you're ever offered a low mortgage interest rate compared to the market, make sure the lender isn't charging you a number of high fees in exchange for the low mortgage interest rate.
Rate Buydown vs. Lender Credit
If you choose to purchase a lower interest rate, often referred to as a "rate buydown" or "buying down the rate," it would be shown to you as Discount Points in Section A of a Loan Estimate. These fees are commonly expressed as a percentage of the loan amount, so as long as the loan amount doesn't change, this fee won't change. Buying down the rate will lower your payment but increase closing costs.
While this may seem good for you, it may make sense for you to take a higher rate with the lender giving you a credit for doing so. This will increase your payment, but lower your closing costs. As the opposite of buying down the rate, this credit is also expressed as a percentage of the loan amount. If a lender shows you a certain credit on the Loan Estimate, that credit should remain the same, assuming no loan details change throughout the process.
Credit Report Fee
A credit report must be pulled on all mortgage applicants, which often generates a fee in the mortgage process. At Local Mortgage, we'll pay this expense for you. If a lender is charging you for a credit report, you'll see this charge in Section B of your Loan Estimate.
Flood Certification Fee
More good news - all loans require a flood zone check, but we'll pay this fee for you, as well. You'll also find this in Section B of your Loan Estimate if you're being charged for it.
If an appraisal is required, we'll order it for you. Like the credit report fee and the flood certification fee, this is shown in Section B of your Loan Estimate as well. Paying for your appraisal is easy and can be done online. This fee, generally $450 to $550, is paid to a local appraiser that gives an opinion of value on the home. It's important to pay for the report in a timely manner to ensure that it's returned as quickly as possible. Remember, the appraisal belongs to you, but it is also important to real estate agents and sellers, since it's a major transaction milestone.
In Section C of a Loan Estimate, you'll find Title fees. These fees are paid to the title company or real estate attorney administering the closing. Some fees you'll see here are title insurance and attorney/settlement fees.
Each lender will have a preferred provider for title services and they will quote their fees accordingly, but it's important to know that title servicers are shoppable, so you are able to search for the best deal. It is best to do this ahead of time and quickly, though. Lenders, title companies, and real estate agents work together to secure your mortgage, so they need to know each other early in the process.
A couple fees on your Loan Estimate and Closing Disclosure will be paid to government agencies. One, generally called a “recording fee,” is the cost of recording the mortgage and deed with the county office. Another group of taxes are commonly called “transfer taxes” or “stamp taxes.” These are taxes paid to the county and/or state based off the transfer of the property, but not all counties or states have these taxes.
Prepaids and Escrows
These sections of your Loan Estimate lay out homeowner's insurance and property taxes. The prepaid section will show any insurance premiums or taxes due at closing. The escrow section will break out the initial deposit of your escrow account. As you make mortgage payments, a portion will be placed into your escrow account to pay homeowner's insurance and property taxes the next time they are due.
Borrowers commonly have questions regarding how escrows are calculated. The easiest way to understand is by using the Rule of 14. When an item comes due, typically insurance or property taxes, there should be 14 months worth of payments in the escrow account. 12 months are used to pay for the item on an annual basis and the remaining 2 months provide cushion. So how do we get to 14 months? Figure out when an item is next due, like your homeowner's insurance or your property taxes. Then figure out how many payments you'll make up to and including that due date. Let's say you'll make 7 payments between now and your insurance renewal date. Your lender would also collect 7 months at closing, so that when the insurance is due, you'll have 14 months. After the insurance is paid and you are insured for another 12 months, you'll have 2 months cushion to start funding the escrow account again, month by month.
Do you have to set up an escrow? No, but it's common in the mortgage industry to charge a fee for not doing so. Lenders prefer to know that the insurance and taxes are being paid.
The last section on your Loan Estimate or Closing Disclosure is called “Other.” This section is generally for fees that are not necessarily part of every transaction but could be part of yours. Here you'll find things like HOA dues, a survey, or a home warranty.
Real estate agent commissions are in this section as well, but they are found in the seller's column.