by Michael Baker, Sr. Loan Officer at Affinity Mortgage, LLC
The number one question I receive from my future clients is: What are these closing costs? Adding to the confusion of closing costs is that from lender to lender and title company to title company different terms can be used. So let’s dig in to closing costs and their typical names and explain each one and talk about the ones that are normal and the ones that can leave you out of pocket hundreds of dollars for no good reason!
Administrative Fee or Underwriting Fee
It is typical for a bank or mortgage lender to charge a fee for the work they do in underwriting the file. Your first thought probably is “Hey wait a second! You’re about to get X% a month in interest from me, and you want to charge me an additional fee to just underwrite the file!?” You’d be right to think that way, but many times banks or mortgage lenders will underwrite many files that never get to the closing table. Those files still require resources, underwriters and processors, working on these files and when loans don’t close from time to time those costs can add up quickly.
Administrative fees can vary from lender to lender. We typically see them from anywhere around $0 (for many Veteran’s and VA loans) upwards of $995. Where things can get tricky is from time to time you will see lenders advertising NO FEE’s options, but as we all know, nothing in life is truly FREE. Many times when lenders say they have $0 in fees you see that come full circle in a higher interest rate. You have to do the math in these scenarios… is it better for me to pay a $0 Admin Fee and take a .25% higher interest rate? Or vice-a-versa. The Admin Fee is generally one paid at closing and you shouldn’t pay this fee unless your loan closes (at least that’s how it works at my company, and I would question ANY other company that is trying to charge this to you up front).
The origination fee is generally a percentage of your loan amount. Back in the day it was typical for lender to charge 1% origination fee as their fee for doing the loan for you. Things changed over the years though and now most lenders get paid on the back end of your loan a % amount of your loan amount after your loan closes. When I see lenders charging origination fees up front I say run for the hills. Now days the only thing an origination fee is good for is lining the pockets of a greedy loan officer. It’s just added profit that goes straight to the bottom line of a lender.
Discount points again are figured as a percent of your loan amount. These can be used for good or evil, let me explain. Generally when you are charged Discount Points you are doing this to “buy down” your interest rate lower. Let me give you an example, let’s say that today based on your merits (credit score, down payment, the type of loan you are doing, etc) that the “par” interest rate (or the rate you get WITHOUT paying any points) is 3.25%. Then the loan officer gives you a Discount Points option whereby you can get a 3.00% rate by paying 2 discount points (or 2% of your loan amount). This is where math (specifically Return on Investment or ROI) comes into play. If you have a $250,000 loan amount then 2% in discount points would cost you an additional $5,000 fee to lower that rate from 3.25% to 3.00%. On a 30 year fixed loan option this amounts to an interest savings of $34.01 a month. Calculating the ROI (Return on Investment) we see that it takes you 147 months, or 12 years and 3 months to recoup your $5,000 investment to “buy down” the rate. Given that this is a 30 year mortgage you might think “that’s a pretty good deal”. However, we generally counsel clients that you want to see yourself recoup those costs in 7 years or less. The reason for this is the average person is only in their current mortgage for 7 years. Even if this is your “forever home” there is a good chance that over time you will refinance to take cash out of the equity in your home to remodel or kitchen. Or perhaps you will refinance into a lower term, etc. So do the math and be leery of any points options that take longer than 7 years to return your investment of the added costs of the points option.
Most home loans, purchase or refinance, are going to require an appraisal. The bank lending you the money is going to want to make sure that they aren’t over lending you money and the easiest way for them to find this out is via an appraisal. These generally run between $400 and $600 depending on the type of loan and type of property you are purchasing or refinancing. The appraisal fee is generally an item you pay for up front, since the appraiser does is work prior to your loan being closed.
Credit Report Fee
Every loan that I am aware of under the sun requires that we pull and check your credit report to make sure you qualify for the loan. A lender is going to pull your credit and ultimately this is a charge that is passed on to the borrower. For me and my company this is a charge that bill to closing. Meaning that if your loan doesn’t close for whatever reason you don’t get charged for the credit report. However, this is a fee that is allowed to be charged to the borrower up front. That’s just not how our company rolls. These credit report fees can be as low as $15 and go up to $100 or more sometimes depending on if your specific credit report has additional items that are needed on top of the standard credit report itself (these are called credit supplements and sometimes are needed by an underwriter to clarify items on your credit report in question).
Tax Service Fee
For loans that have their insurance and taxes escrowed (or impounded – meaning rolled monthly into your mortgage payment) there is a Tax Service Fee. This is a one time fee charged at closing. The fee goes to the mortgage servicer who will handle the monthly collection of your tax payment and subsequent paying out of your tax bill throughout the year when the bill is due.
Flood Certification Fee
Every home, whether it be on a mountain top or in a valley next to a river, is going to require that a flood certification be done to find out if the home resides in a flood zone. If your home is in a flood zone it generally requires specific flood insurance on top of your standard home insurance and a lender needs to know this up front. This fee is usually $5-15 and again is an item that is billed at closing.
Some loans like VA and FHA loans require an upfront funding fee. This is a percentage amount of your loan and can vary from as little as .5% to as high as 3.3% of your loan amount. For disabled Veterans the funding fee is waived. This is a fee put in place by the government to help fund the types of loan programs in place. These funding fees are not generally paid up front nor at closing, they are actually instead rolled into the loan amount itself. For instance if you have a $200,000 loan amount and a .5% funding fee ($1,000) then you end up with a loan amount of $201,000. In this case the funding fee is simply financed into the loan amount.
Any time a home is purchased or refinanced we must engage a title or escrow company. They review all title work, deed, etc, and make sure that the home is properly free of any encumbrances (liens, encroachments, easements, etc). A title company is generally going to charge the following fees; Closing or Escrow Fee, Lenders Title Insurance Fee, Owner’s Title Insurance Fee, Attorney Fee, Notary Fee, Abstract Fee… and sometimes more. It is impossible for me to list each and every fee as title companies can vary, and then from county to county, state to state, these fees can vary even more. Two things to note here; 1. Many/most title companies have a “title fee calculator” on their website. This can be a great resource to get an idea of what to expect. 2. But more importantly would be to check with your loan officer. Many times we have special pricing set up with title copmanies better than you could get if you contacted the title company directly. So just ask your loan officer and they will provide you the title company fees for you! These are items that are paid at closing, but be careful to check with the title company you use, as some title companies will bill you for title fees even if your loan doesn’t close.
Government Recording Fees
These fees will vary greatly from county to count and state to state. Again please check with your loan officer. The two typical fees we see are city/state mortgage tax/stamps and recording fees. These fees are billed at closing and not something you pay for up front.
While these are not technically “fees” they are still “costs” that you must incur at closing. It is typical to put at least 2 months of your taxes and home owner’s insurance into your escrow account up front. Over time your home owner’s insurance and tax bills will rise. A mortgage servicer likes to be prepared for this by having a couple of extra months of your insurance and tax bills set aside so as to not shock you when these amounts change. Depending on what month of the year you close however, more than just two months may need to be collected depending on when your loan closes. Along with a couple months of taxes and insurance reserves, if this is a purchase, you can expect to have one full year of your home owner’s insurance premium collected as well at closing.
These fees above are not all inclusive. There could be additional fees needing to be collected on your loan depending on different circumstances, loan types, additional title items that arise or perhaps different government recording fees based on your specific city/county/state. Also as I noted above different lenders can call these fees/costs by different names. The key is to get a “Loan Estimate”(use this word specifically) up front from any lenders you are shopping and then compare notes. You can always feel free to send me the Loan Estimate of any lender and I am happy to match them up apples to apples to make sure you aren’t paying for a needless and pointless junk fee! Homes these days are already super expensive, don’t overpay for your loan costs.