There is a wide range of charges that should be expected when purchasing a home. Some of these fees are legitimate costs associated with the purchase while some others are excessive fees levied by the lender to pad their profits. The good news is that it is easier these days to remove these excessive charges from the amount you will ultimately pay. By shopping around and negotiating, you may be able to reduce your loan’s costs by a significant amount.
Origination Fees
Origination fees may be called by a multitude of names, including commitment fees, application fees, processing fees, or underwriting fees. These costs are supposed to reflect the work that goes into creating your loan, but the fees can vary widely from lender to lender. By asking the lender for a good faith estimate of the fees that will be charged for handling the loan, you will be able to compare the amount of the origination fees you will pay to each lender for the loan. Compare at least three lenders’ bids and review the averages for your state before deciding what lender to give your business to.
Title Insurance Fees
There are two kinds of title insurance that can be applied to your loan. Lender’s policies protect the lender and are generally required as part of the mortgage deal. An owner’s policy, which protect you, may or may not be required as part of the deal. Picking up the cost for both policies can cost thousands of dollars. You may be able to shop around for cheaper title insurance by checking online title insurance quote sites.
Credit Report Fees
Although lenders have to pay a fee for pulling your credit report and credit score, they often pay less than you would for obtaining your own report because they receive a volume discount from the credit monitoring bureaus. Credit report fees should be in the low two digits, typically under $25. A higher fee may be justified if more than one borrower is on the loan, but if you are being charged much more, you should ask why.
Appraisal Fees
Appraisal fees will typically depend on the value of the property, with higher value properties commanding higher appraisal fees. For most single-family homes, the appraisal fees are generally less than $400, according to a recent survey conducted by Bankrate. If the lender is charging you more than this for the appraisal fees, you should ask them why and have them explain why the higher fee is necessary. In some cases, it is because the lender is funneling business to a treasured partner instead of the most economical provider.
I’m a huge fan of shopping around for mortgages. I eventually went with a mortgage broker who offered no closing costs with the trade-off being a .25% higher rate. While this may mean slightly higher interest costs over the long term, it saved me $1700 up front which in my case put the break-even point at about 10 years. The bigger benefit of no closing costs is that refinancing is an easier decision, I’ve refinanced my house 3 times in the last 2 years and dropped to 3.25% on a 15 year loan. Each time it only costs me $300-400 for the appraisal.
One thing I did not see in this article was PMI (private mortgage insurance). If you’re financing more than 80%, lenders will usually want this as well. If you’re using a mortgage broker, ask him to shop around for this. I did this and knocked $40/month off the payments just by asking.
Great article, I look forward to reading more on your site.