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If you're considering buying a home, you've probably thought about what you need to save and how much your monthly payment will be. But wait, there's more. Throughout the homebuying process, various mortgage fees will pop up, and if you don't know what to expect, they might catch you by surprise.
Knowing what to look for can help you plan accordingly, and if you pay close attention, you may be able to scrap a few fees altogether. Read on for an overview of common mortgage fees and some tips on identifying and maybe even avoiding some of them.
What Are Mortgage Fees and Closing Costs?
Most mortgage fees fall under the umbrella category of "closing costs." Closing costs typically equal 2% to 5% of the home sale price and are paid when you sit down at the table to sign the final documents and transfer ownership.
The following fees are some of the more common expenses charged as part of the closing costs. This list is not exhaustive, and depending on the nuances of your home purchase, you may be responsible for paying other fees as well.
- Appraisal Fee. This covers the cost of having a certified appraiser determine the value of the home you are purchasing. An appraisal ensures the value of the home is enough to cover the loan.
- Home Inspection Fee. This fee covers a professional home inspection, which is critical to making sure you aren't buying a home with unknown problems. Many lenders require an inspection, but either way, it's smart to get one to protect yourself and your investment.
- Loan Origination Fee. You pay this fee to the lender for the costs of considering and organizing your new loan. This fee may encapsulate other fees like application and underwriting, so make sure to ask what it includes so you don't get double-charged for any services.
- Application Fee. You may have to pay multiple application fees when getting a mortgage. These fees may be included in your loan origination fee, so read your loan documents carefully and check with your lender if you think you may have been double-charged. Application fees may also be charged if you need to apply for private mortgage insurance (PMI), which happens when you are putting down less than a 20% down payment.
- Credit Report Fee. At some point in the mortgage process, your lender will check your credit. This fee covers their cost to obtain a copy of your credit reports and scores.
- Recording Fee. This fee covers the local government's charge to confer and record your new property's deed.
- Document Preparation Fee. This fee covers the preparation of the many documents that will be signed and organized at your closing. Umbrella fees charged by the lender may also include this fee, so pay close attention if you see this pop up.
- Title Insurance Fee. This fee is paid to a title insurance company and will cover the cost associated with insuring the transfer of the deed to your name.
These fees can range from hundreds to thousands of dollars and cover expenses that are standard to the homebuying process. If you don't know about them in advance, they may come as a shock. But nearly every homeowner pays these fees, and in many cases they are for services critical to purchasing a home. Just make sure you're not paying them twice, and ask your lender if you are confused by any unfamiliar fees.
What Are Junk Mortgage Fees?
While most mortgage fees are standard, some lenders may throw in extra "junk" fees that you should watch out for. These include redundant fees or charges for services covered by other fees you're already paying. If in doubt, have a conversation with your lender about any fees that look exorbitant or stick out as redundant. Read all documents associated with your mortgage carefully, and ask your real estate agent, mortgage broker or lender detailed questions about the fees they ask you to pay.
Can I Save Money on Mortgage Fees?
Most mortgage fees are unavoidable, but some have room for negotiation. Whenever you apply for a loan, the lender is required to give you a Loan Estimate, which outlines all of the costs and payments associated with the loan. After reviewing your Loan Estimate, talk to your mortgage broker or lender about any fees that could be reduced or eliminated to see if you have any wiggle room.
Origination fees, for example, are charged by a lender and in some cases have the potential to be negotiated. This fee is often 1% or 2% of the loan amount and is used to cover the general processing of the new loan. Origination fees vary, so it's important to shop around and ask about flexibility with the origination fee upfront. Having a good credit score might help with this negotiation, so before you try to bargain, make sure you know what your credit profile looks like.
Another way you might be able to trim the cost of your mortgage is by purchasing discount points. Buying points is a way to reduce your interest rate by prepaying a percentage or so of the total mortgage amount. By paying this upfront, your interest rate will drop and your monthly payment will be slightly lower. There is no set standard to how much the rate will be decreased, though generally the interest rate decreases .25% per discount point purchased. Ask your lender about the possibility of discount points when shopping for a loan.
What to Consider Before Shopping for a Mortgage
If you're shopping around for a mortgage, or are in the early stages of browsing the market, consider getting a free copy of your credit report from Experian so you know what lenders will be looking at when evaluating your mortgage application. Your credit scores and past credit history are key factors that will dictate whether you are approved for a mortgage and what your interest rate will be, so knowing them ahead of time may help you make good decisions while shopping around. To learn more, see other important information on mortgages from Experian.