Many mortgage companies offer “no cost loans.” But as mentioned before, a true no cost loan doesn’t exist. The mortgage company and people who spend months of work to close the loan increase an interest rate to receive their compensation.
If you choose to get the lowest interest you can, how do you make sense of the fees?
Although fees are different for each situation, there are some commonalities. Here are some facts to help you understand:
Third Party Services
Closing a mortgage requires work from several different sources. Some of the work being done to close the mortgage comes from a third party. Examples include:
A mortgage loan cannot be completed unless the lender knows the value of the collateral (the home). In most cases, a certified and licensed appraiser is required to evaluate the property. The appraisal process typically costs around $600.
There are various electronic services like credit reports, flood certifications, tax certifications, and more that charge a small fee for their one-time use. These are usually no more than a few hundred dollars total.
Escrow or Title company
Any time a mortgage loan is done on real property, the lender will require various title and escrow services. These include obtaining a title report to see the current lien holders, ensuring the current lien holders are paid off, adding the new mortgage company as the new lien holder, providing an insurance policy for the title of the property, recording and finalizing the transaction with the county, and more. You can expect these fees to be several thousand dollars.
There are more third-party services than those listed above (survey, pest inspection, and more) but these three are common generalizations. Most importantly, there isn’t a ton of margin or profit built into these fees. Also, most of them are required to make a mortgage loan happen.
Taxes and Insurance
Every mortgage company will require you to pay for insurance and taxes on the home as part of closing the mortgage. If you don’t have insurance and the home is damaged, the mortgage company is in trouble. If you don’t pay taxes, the county will put a lien on your home and be in an ownership position of the property. Those are two of many examples that help explain why the lender requires taxes and insurance to be paid.
In most cases, you will see taxes, insurance, and portions of interest show up in two sections of a mortgage fee disclosures. Those two sections essentially mean the same thing. You are paying now (at closing) for taxes, insurance, or interest that would be due in the future. Paying for them at closing ensures these required items are current and set up to stay current at the beginning stages of the loan’s lifecycle. Expect these fees to be a few thousand dollars.
Loan Origination and Processing
These fees are the initial profit or commissions paid to the mortgage professionals and mortgage company closing the loan. Keep in mind that these fees are not the total of the commission paid. Mortgage companies and mortgage professional can get paid in many ways on a mortgage loan. However, it takes a lot of work to make a loan happen successfully. As a result, they deserve compensation. You simply want to ensure the compensation is fair.
These fees are often negotiable and dramatically impacted by the interest rate. This is where asking the right questions can help.
What should you expect the total mortgage fees or closing costs to be?
As mentioned above, the mortgage fees are different for every situation. However, the two largest factors that determine the fees are:
- Loan amount.
- Interest rate.
On average, the Consumer Finance Protection Bureau states that you can expect a total of $8000 in estimated closing costs for every $150,000 you obtain in a loan.
Transparency, full disclosure, and genuine care for your needs are a big deal. If you’re interested in a greater explanation of mortgage fees, schedule an appointment with us!