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If you're like most people who are planning to buy a home, you're focusing on saving for a down payment and ensuring you have the income to make the monthly mortgage payment. But don't forget about the mortgage fees that can pop up during the process and add to the overall cost of homeownership.
Here's an overview of the most common mortgage fees and some tips on identifying and potentially avoiding some of them.
Common 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 for the most part paid on the day you sign your final loan documents and assume responsibility for the mortgage.
By financially preparing yourself for the following fees, you can budget effectively to help ensure the homebuying process goes smoothly.
1. Appraisal Fee
A home appraisal fee is one of the first fees you're likely to encounter. Lenders require an appraisal to help ensure the property's value is enough to provide sufficient collateral for the loan. If you fail to repay the loan, the lender will seize and resell the property, so verifying the property's market value reassures the lender that it will be able to recoup all or most of the loan amount.
A home appraisal typically costs $313 to $422, with most homebuyers paying $354 to have a single-family home appraised, according to HomeAdvisor. The home appraisal also benefits you as a buyer because it helps you verify if the property is worth the amount you offered. With an appraisal contingency in place, you can walk away from the deal if the appraisal isn't quite what you expected.
2. Home Inspection Fee
The average cost for a home inspection runs from $275 to $400. This fee covers a professional home inspection, which is critical to making sure you aren't buying a home with unknown (and potentially costly) problems. Many lenders require an inspection to protect their financial interest, but an inspection also serves to protect you and your investment in a home.
A home inspector assesses the condition of the interior and exterior of the home and its electrical, plumbing and other systems. Upon completion, your home inspector should provide you with a detailed report of their findings. You can use this report to make informed decisions, such as negotiating repairs with the seller or adjusting your offer based on the appraiser's findings. Like an appraisal contingency, an inspection contingency allows you to pull out of the deal if the findings of the inspection aren't to your liking.
3. Loan Origination Fee
A loan origination fee is an upfront charge from your lender to review your application, verify your information and perform other necessary administrative tasks to process your mortgage loan. Loan origination fees typically range from 0.5% to 1% of the loan amount.
This fee may encapsulate other fees, such as application and underwriting, so make sure to ask what it includes so you don't get double-charged for any services. And, if you're comparing different mortgage loan offers, pay attention to each loan's origination fee—along with the interest rate and loan terms—as they can significantly impact the overall cost of your mortgage.
4. Loan Application Fee
Application 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.
Generally, the loan application fee is a flat amount that varies by lender but can cost up to $500. Some lenders do not charge an application fee at all, and some may reduce or waive the fee if you already have an account with the financial institution servicing the loan.
5. Credit Report Fee
The credit report fee, which typically costs around $35, is a fee lenders charge to pull your credit report from at least two credit bureaus. Lenders want to review your credit reports to determine your eligibility for a mortgage loan and establish the interest rate you'll pay on the loan. This fee is usually non-refundable whether your loan application is approved or denied.
6. Recording Fee
This recording fee covers the local government's charge to confer and record your new property's deed. Documenting and recording the transaction is essential as it creates a public record solidifying your legal ownership of the property.
Each county and municipal office sets its own fee schedule for recording the mortgage deed transaction, but you can expect the charge to range from $20 to $250. These fees are typically included as part of your closing costs.
7. Document Preparation Fee
The document preparation fee covers the preparation of the many documents that will be signed and organized at your closing. These documents typically include the promissory note, mortgage or deed of trust and other disclosure forms. Umbrella fees a lender charges may also include this fee, so pay close attention if you see this charge.
The document preparation fee typically costs no more than $100 and is usually disclosed upfront during the loan application process.
8. Title Insurance Fee
This fee is paid to a title insurance company and covers the costs of insuring the transfer of the title to your name. Lenders often require you to purchase title insurance as protection—for you and your lender—against potential ownership disputes, liens or other title-related issues.
While title insurance costs vary from state to state, and the purchase price of your home is a factor, the average cost is roughly $1,000 per policy.
What Are Junk Mortgage Fees?
"Junk" or "garbage" mortgage fees are excessive fees packed into your mortgage that often are not disclosed upfront. As such, the Consumer Financial Protection Bureau (CFPB) proclaims that junk fees hide the true cost of a product or service.
Junk fees may include fees for things you believe are already included or paid for, unexpected or excessive fees and unclear fees, according to the CFPB. When buying a home, watch out for redundant fees that charge you for services covered by other fees you're already paying. It's wise to talk to your lender, mortgage broker or real estate agent for details about what each fee covers. Verify you aren't paying twice or excessively for services. For example, there may be redundancies between the application, processing and administrative fees.
How to Save Money on Mortgage Fees
Most mortgage fees are unavoidable, but some fees and other closing costs are negotiable. Consider the following tips to save money on your mortgage fees.
- Review your loan estimate(s). When you apply for a new mortgage, the lender must give you a loan estimate that details 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 may be reduced or eliminated.
- Shop and compare loan offers. Having loan estimates from several lenders can help you compare mortgage fees and other closing costs—along with your interest rate and term—to identify the best mortgage loan. Also, getting quotes from appraisers, title insurance agents, inspectors and other professionals may improve your position if you can demonstrate lower prices offered by competitors.
- Negotiate the loan origination fee. Review your loan estimate for the loan origination fee, which typically ranges from 0.5% to 1%. If you have a good credit score, you may be able to negotiate with your lender for a lower fee or have it removed altogether. However, a lender may require you to pay a higher interest rate or extend your loan term to secure a lower origination fee.
- Negotiate mortgage fees with the seller. You may be able to negotiate with the seller to have them cover some, or all, of the closing costs. They can do so by contributing a portion of the purchase price toward the closing costs, lowering your upfront expenses. It's important to note that not all lenders or loan programs allow seller concessions, and there's no guarantee a seller will agree to them—especially in a hot housing market.
- Purchase 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 decrease, though generally, the interest rate decreases 0.25% per discount point purchased. Ask your lender about the possibility of discount points when shopping for a loan.
Review Your Credit Before Applying for a Mortgage
Before shopping for a mortgage, consider getting a free copy of your credit report from Experian. When you review your report, you see what lenders will see when they evaluate your mortgage application.
Remember, your credit scores and payment history are critical factors lenders consider when determining your mortgage approval and interest rate. Knowing these factors ahead of time can help you make informed decisions or, if necessary, take steps to improve your credit before applying for a mortgage.