The homebuying process can be complex with paperwork to sign, industry jargon to decipher, and real estate agents and mortgage brokers to meet. It's important to take time to understand all the costs, including what may be unnecessary costs.
Many costs associated with a mortgage include closing costs such as loan origination fees and appraisal fees. Knowing these costs before you get to the closing table can help you understand where your money is going and whether you are paying junk fees.
The Consumer Financial Protection Bureau (CFPB) determined that consumers are indeed paying unlawful junk fees related to mortgages in various ways, including through excessive late fees, unnecessary inspection fees, fake mortgage insurance premium charges, and fees paid despite financial loss mitigation options.
- The CFPB found consumers can pay illegal fees for unnecessary inspections and mortgage insurance as well as excessively high late fees.
- Some consumers may pay fees that could be waived with financial loss mitigation options.
- Junk fees can include excessively high fees for application, underwriting, mortgage rate lock, loan processing, and broker rebates.
- Recurring closing costs are expenses that you pay at closing and each month thereafter, such as real estate taxes.
- Nonrecurring closing costs are one-time payments, such as points, loan fees, and home inspection fees.
What Are Junk Fees?
Junk fees are unnecessary fees that add costs but little to no value. Consumers are paying billions of dollars in junk fees on various financial products, including with mortgages, according to the CFPB.
Homebuyers may unknowingly pay illegal fees with several costs related to mortgages, They include:
- Excessive late fees: The CFPB found that mortgage servicers may charge the highest level of late fees allowed by law even when the buyer's mortgages caps it at a lower amount.
- Unnecessary inspections: Buyers are also vulnerable to paying for unnecessary inspections if servicers pay inspectors to go to an incorrect address and then pass the charge on to buyers. The fees can range from $10 to $50.
- Mortgage premiums: The CFPB also found cases where servicers charged private mortgage insurance (PMI) premiums when buyers did not owe them.
- Fees during financial hardship: A servicer may fail to waive fees for buyers who are entering loss mitigation options such as charging late fees while the mortgage was under forbearance under the CARES Act when those fees should have been waived.
Many junk fees related to mortgages are associated with closing costs, which are the fees related to closing on a mortgage. They can include recurring and non-recurring expenses like mortgage insurance, loan origination fees, and appraisal fees.
Recurring costs are paid at closing, then monthly thereafter. These include real estate taxes, homeowners insurance, and—if you’re putting down less than 20% of the purchase price—private mortgage insurance (PMI).
These expenses must be funded in advance at the time of purchase, which is done by putting funds into an escrow account to cover the next year’s obligations.
Nonrecurring costs are also paid at closing. They may include:
- An application fee (profit for the lender)
- A series of loan fees (these may include an origination fee, appraisal fee, credit report fee, tax service fee, underwriting fee, document preparation fee, wire transfer fee, office administration fees, et al.)
- A broker’s service fee (if you are working with a mortgage broker)
- Any lender-required home inspections (e.g., 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)
Other Costs at Closing
Closing costs may also include:
- Federal Housing Administration (FHA) fees
- Veterans Affairs (VA) fees
- Rural Housing Service (RHS) fees associated with mortgages guaranteed by the government
- A flood determination fee, to investigate whether the property is in an area prone to flooding
- A land survey to verify the property’s boundaries
- Title charges (which may include a title settlement fee, title search fee, title examination fee, closing service letter fee, deed preparation fee, notary fees, title insurance fee, and any attorney fees)
Other miscellaneous costs may include a courier/delivery fee, endorsements, recording fee, transfer tax, and an optional home warranty.
How Much Are Closing Costs?
As a general rule, you can expect to spend 3% to 6% of the purchase price in closing costs. Fees vary widely based on the lender, the geographic location of the property, and the price of the home. Consult the CFPB's Your Home Loan Toolkit, which is a guideline for evaluating fees.
All-In-One Closing Cost Pricing
Consumers who are overwhelmed by fees may want to consider an all-in-one, flat-rate fee that includes all closing costs. Use caution when shopping for these products, making sure that you purchase the one that applies strictly to mortgage closing costs and not to other banking relationships or products.
Reducing Mortgage Costs
If the real estate market in your area is favorable to buyers, then you may be able to negotiate with the seller about paying closing costs.
Comparison shopping is another way to get competitive rates with mortgage costs. Ask several lenders to provide loan estimates, then compare the results. This will help you understand the range of closing fees in your area.
Can I Negotiate Mortgage Fees?
You can negotiate many mortgage fees, including negotiating the closing costs with the seller. Closing costs can include loan origination fees, title search fees, and appraisal fees, among many others.
How Do I Avoid Loan Origination Fees?
Loan origination fees cannot be entirely avoided as either the buyer or seller must pay them. If you are buying a home and want to avoid loan origination fees, you can try to negotiate with the seller regarding who will be responsible for paying loan origination fees. You could potentially ask your lender to lower the amount of their loan origination fee as well.
What Are Points in a Mortgage?
Points in a mortgage are used to reduce the interest rates in a mortgage. They are fees that they buyer pays the lender to lower the interest rate. Mortgage points are also called discount points.
The Bottom Line
The official form that includes a breakdown of all closing costs is called a closing statement or closing disclosure. You have a right to see this document at least three business days in advance of closing. Request it and compare it with the loan estimate. If the numbers aren’t reasonably close, then ask questions.
By comparison shopping and to carefully reviewing all documentation in advance, you can minimize the expense of closing costs.