Watch Out For "Junk" Mortgage Fees

By Lisa Smith AAA

For most people, buying real estate is an uncommon occurrence. Engaging in real estate transactions just once or twice in a lifetime provides little opportunity to become intimately familiar with the process. There are mountains of paperwork to sign, a confusing new vocabulary to deal with, and a host of fast-talking sales people - from real estate agents to mortgage brokers - who smile, point and tell you where to sign.

Somewhere in the mix of elation at purchasing a property and boredom from signing forms, it's easy to lose track of what you're paying for and how much you're spending. Aside from the amount of the mortgage, most of the other expenses get lumped into a category referred to as "closing costs". Paying attention to these costs can help you understand where your money is going and maybe even save you a few hundred dollars. Read on to learn more.

Closing Costs: What Are They?
The phrase "closing costs" is shorthand for the total cost of several dozen potential expenses associated with purchasing and financing real estate. These expenses can be categorized as "recurring" and "nonrecurring".

Recurring Costs
Recurring costs get paid not only at closing, but also on a monthly basis thereafter, and include real estate taxes, homeowners insurance, and, if you're putting less than 20% down, private mortgage insurance (PMI). (For more on PMI, check out Six Reasons To Avoid Private Mortgage Insurance and Outsmart Private Mortgage Insurance.)

These expenses must be funded in advance at the time of purchase, which is done by putting them into an account so that they are available to cover the next year's obligations. This is known as putting the money in escrow. Depending on your closing date, it may also be necessary to prepay interest to cover your first few days or weeks in the home. (Learn the 10 steps that lead up to closing the deal on your new home and taking possession in Understanding The Escrow Process.)

Nonrecurring Costs
Nonrecurring costs are also paid at closing. They may include:

  • points
  • an application fee (profit for the lender)
  • a series of loan fees (that may include an origination fee, appraisal fee, credit report fee, tax service fee, underwriting fee, document preparation fee, wire transfer fee, office administration fees, etc.),
  • a broker's service fee (if you are working with a mortgage broker)
  • any lender-required home inspections (such as a pest inspection)
  • the cost of a lender-required home appraisal (in which someone is paid to verify that the property is worth at least as much as the selling price)

Closing costs may also include:

  • Federal Housing Administration (FHA) fees
  • Veteran's Administration (VA) fees
  • Rural Housing Service (RHS) fees associated with mortgages guaranteed by the government
  • a flood determination fee to investigate whether the property is an area prone to flooding
  • a land survey to verify the property's boundaries
  • title charges (which may include a settlement fee, title search, title examination, closing service letter, deed preparation, notary fees, attorney's fees and title insurance).

A host of other miscellaneous costs may include a courier/delivery fee, endorsements, recording fee, transfer tax and optional home warranty.

How Much Do They Cost?
Fees vary widely based on the lender, the geographical location of the property and the price of the home. The Federal Reserve Board provides some general guidelines for some of the most common fees:

Fee Cost
Application Fee $75 to $300 (including credit report for each applicant)
Loan Origination Fee 1-1.5% of loan amount
Points 0-3% of loan amount
Appraisal Fee $300 to $700
Lender-Required Home Inspection $175 to $350
Prepaid Interest Varies based on loan amount, interest rate and number of days that must be paid ($300 to $750 is not unusual)
Private Mortgage Insurance Up to 1.5% of loan amount to prepay first year
FHA, VA, or RHS Fees 1.5%, 1.25-2.0%, or 1.75%
Homeowners Insurance $300 to $1,000/yr. depending on home price
Flood Determination Fee $15 to $50
Survey $150 to $400
Source: Federal Reserve Board

Watch Out for the Garbage
"Garbage fees", also known as "junk fees", are tacked on to most mortgages. There is no way to completely avoid them, but you can often minimize them.

Look out for excessive processing and documentation fees in the following categories:

  • Application fee
  • Underwriting fee
  • Mortgage rate lock fee
  • Loan processing fee
  • Broker rebate

If any of these fees seems to be unusually high, ask about them, as they can often be negotiated. This advice applies to other fees as well. If it looks funny, ask about it. Often, the mere act of questioning the fee will result in the fee being lowered or eliminated.

All-In-One Closing Cost Pricing
Realizing that consumers are overwhelmed by the fees and frustrated at the process of trying to determine whether the fees are fair, some lenders now offer "all-in-one" flat-rate fees that include all closing costs. The "all-in-one" terminology is used to describe other mortgage products as well, such as mortgages that are tied to checking accounts, so care must be taken when shopping for these products to purchase the one that applies strictly to mortgage closing costs without consideration to other banking relationships or products. (Offset mortgages combine a checking account, home-equity loan and mortgage into one account. Learn more about it in All-In-One Mortgage A Good Option For Thrifty Buyers.)

As a general rule, you can expect to spend from 3-5% of the price of the property in closing costs.

Minimize the Pain
If the real estate market in your area is favorable to buyers, you may be able to ask the seller to pay closing costs. If that isn't an option, getting an all-in-one mortgage is probably the best way to minimize the feeling that you are being taken advantage of during the closing process. While you are still paying the fees, you won't need to despair over them one fee at a time.

Comparison shopping is another way to get comfortable with the process and get a better feel for the costs. Ask half a dozen lenders to provide good faith estimates and compare the results. This will help you learn the terminology and get a sense of the range of closing fees in your area. Once you choose a lender and have a good faith estimate in hand, save it. It will come in handy later.

Conclusion
The official form that includes a breakdown of all closing costs is called an HUD-1 form. You have a right to see the HUD-1 document 24 hours in advance of closing. Ask for it and compare it to the good faith estimate. If the numbers aren't reasonably close, ask questions.

By spending time to comparison shop and by carefully reviewing all documentation, you can minimize the expense and anxiety associated with the closing costs involved in purchasing real estate.

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