Obtaining a mortgage can be a confusing and stressful process, particularly when your mortgage banker first shows you the laundry list of mortgage fees you are required to pay at closing.
For the typical homebuyer, these fees can add up to thousands of dollars. That's big money. Before writing that check, let's take a moment to uncover exactly what these fees are and how they work.
What Are Mortgage Fees, and How Do They Work?
Mortgage fees, simply put, are costs associated with originating your mortgage that you are required to pay. Some can be rather expensive, while others can be pretty cheap. Some are negotiable, others are set in stone.
One thing that is consistent, though, is the settlement statement. This document gives you an itemized list of all of the fees you will be required to pay. The bank will give you a preliminary list early in the loan process, using estimations for all the fees. The final settlement statement will be the exact figures, down to the penny.
Some Specific Fees You Need to Understand
So, what exactly should you expect to see on your settlement statement? Here's a breakdown of some of the larger and more common fees you'll certainly see.
- Origination or document fees: This fee is charged by the bank to cover its administrative costs in the mortgage process. These fees can cost a few hundred to a few thousand dollars, depending on your specific loan and bank. However, these can sometimes be negotiated lower.
- Points: Points are a fee you can pay to lower your interest rate. One point is equal to 1% of the total mortgage amount. Paying for points can make sense if you are going to own your home for a long period of time. If you'll be moving in just a year or two, buying points probably doesn't make financial sense.
- Appraisal fee: This fee is used to pay for the appraisal of your home. It will generally cost you a few hundred dollars.
- Title insurance: This insurance coverage protects you in case the person selling the property doesn't actually own it. Don't worry, though, the insurance company verifies this before loan closing, so you'll be good to go before any money is exchanged. This cost is highly variable depending on your specific situation.
- Property taxes: Your local government will require you to pay any pro-rated taxes due at closing. This is, obviously, non-negotiable. This cost will vary by state, county, and even city.
- Homeowners insurance: Similar to property taxes, your homeowners insurance will require prepayment for the current year's insurance premium. Prices will vary, so shop around.
- Other miscellaneous fees: You should also expect to see a bevy of other, smaller fees. There may be credit score fees, filing fees, legal fees, a survey fee, or more. Generally, these smaller fees are costs to pay for a service needed in the mortgage process. If you have a specific question when you review your own settlement statement, don't hesitate to ask for explanation.
Armed with this knowledge, you're now equipped to go to banks with confidence, comparison shop for the best interest rate and lowest fees, and successfully find the best mortgage loan for you.