Two Categories of Fees
Closing costs fall into two basic categories: government- and lender-related. Depending on how the deal is negotiated between buyer and seller, state and local governments collect city, county, and state transfer taxes (where applicable); document recording fees; and, of course, prepaid property taxes. There may be other fees unique to your community as well, so ask your real estate agent or attorney about them.
Costs related directly to the mortgage include points, loan origination, and application fees (some lenders choose one or the other), credit report fees, and various document fees. Depending on rules and laws in the state where you live, you can expect various mortgage and purchase-related costs to be between 3 to 6 percent of what you borrow. If you find you're paying above 6 percent of the total amount of the loan in fees, you'd better ask why.
A junk fee is anything associated with your loan application that's a onetime charge that may be worth negotiating. It could be payments to the lender, the appraiser, the credit agency, the bank's own attorney, home inspectors, title company, government, or random insurers. Basically, if it's not an interest or principal payment, question it. If your loan officer waves you off, tell her she doesn't need your business — or the business of anyone you know.
Fees You Need to Scrutinize
One of the most challenging things about getting a mortgage is that there are no uniform amounts for fees. Worse, there are no uniform names for fees. Here's a rundown of the many fees you might hear about and whether some are worth questioning more than others:
Application and processing fees: You'll hear a lot of lenders trying to give you the sales pitch, “No application fee!” Over the last fifteen years, mortgage lenders have gotten good at renaming fees, “eliminating” fees as a come-on, and, most importantly, moving fees to other parts of the transaction to make sure they make their money. Application fees can run from $200 to $300. If the fee is waived, make sure it hasn't simply been moved to somewhere else.
Credit report: If you went to a particular credit reporting agency's site and ordered your own credit report for $14, don't let a lender charge you $20. Credit checks may seem like small potatoes in the overall scheme of things, but lenders will tack on a few bucks more wherever they can. Plus, lenders are volume buyers of credit reports — why would they need to pay more than you would retail?
Appraisal fee: Lenders want to know the home you're buying can justify its market price. Appraisals are also necessary for refinancing since your lender will want to know whether the value of your home exceeds what you hope to borrow in equity. Depending on your market and the size of your property, this can run from $200 to $400. Call some local appraisers to see what's average for the property you're hoping to buy or the home you're refinancing, and compare those estimates to what your lender is proposing to charge you.
Origination fee: This fee covers the processing segment of getting you your loan. However, since points are basically the lender or broker's cut for supposedly getting you a lower rate, you really need to be asking whether you need to pay this fee if you're paying points. This is also called an administration or commitment fee. By any other name, it might still be a junk fee.
Lock-in fee: When rates are volatile, many borrowers want to make sure the rate quoted them sticks through their closing. Though you must always have written confirmation of a locked-in rate, it's questionable whether a lender or broker really needs to charge you for that. Always ask about whether a locking fee is required.
Prepaid interest: This payment is used to cover the interest that accumulates between your house closing and the start of the next month. The farther down the calendar month you close, the lower the prepaid interest will be.
Points: These are also called discount points. Each point is equal to 1 percent of the total loan. Points are typically calculated at an inverse relationship to the loan's interest rate. Remember, a lender is making money off of both of these items — if you don't want to pay a bunch of points, fine — the lender will probably bump up your interest rate to make what he needs to make. If you want a lower interest rate, expect to pay higher points.
Title insurance: Title insurance covers a lender's cost of the loan in case a title search is faulty — that is, if a title search fails to turn up liens or other claims on a piece of property. Title insurance, which adds at least a few hundred dollars to the transaction, is one of those great fee annoyances because it's there essentially to protect the lender's interest ahead of yours. Yet you also don't want to find out your property has a ton of liens against it, either. If the policy is issued, that means the title is clean. However, don't overpay. Check what fees in your area are first.
Document preparation: Granted, getting a mortgage loan means a lot of paper, but it's not like anyone's spending hours typing them anymore. Most mortgage functions are computerized, from their basic questions to you throughout the approval process. See if this fee is really necessary.
Underwriting fee: This is another possible junk fee that might be interchangeable with the term administrative fee. Though underwriters exercise an important function in the mortgage approval process — they're the people who sit down with all your credit data and other information and determine whether you're an appropriate risk — you should ask a banker or broker to define and then defend this fee.
Appraisal review fee: Do you really need to pay a lender to police its own appraisals? Question this fee.
Survey fee: Some states require a copy of the property's current plat of survey with the title search. Check what your own municipality would charge you for a copy and compare it with your lender's estimate. See if they'll take a copy you'll pick up at city hall, if that's convenient.
Courier fees: Come on. Unless you're doing some complicated out-of-town transaction or there's some sort of rush, there's no need to hand-carry documents. Most lenders are scanning and e-mailing documents these days.
Tax service fee: This fee may be charged to verify that property tax payments to the local assessor's office have been made and credited to the correct piece of property. Ask your lender what that verification looks like so they know they have to prove you're paying for something.
PMI application fee: If you make a down payment of less than 20 percent, you'll be required by your lender to pay private mortgage insurance, which the lender arranges for you. Some lenders will charge you a fee to do this — see if it's necessary.
When a pipe bursts in your house, your homeowner's insurance pays for it. But if there's water outside your home and it comes onto or into your property, it's a flood — and your homeowner's insurance won't cover it. Most flood plains throughout the country have been identified, and your lender will require you to buy government flood insurance through the National Flood Insurance Program if it's available in your area. Such insurance costs at least $300 a year.
Learning about fees — those necessary and unnecessary to the process — is a critical step in understanding the mortgage process. Devote some time to studying them so you can ask proper questions about how fees will affect the overall cost of your mortgage.
