Mortgage Closing Costs
Unfortunately, the interest rate isn’t the only premium you pay to obtain a loan from mortgage lenders. Obtaining a new loan, or refinancing an old one, usually comes with a bevy of additional lender fees, and even a few third party fees associated with the legalities of the process. Detailed below are a few of the more common fees you might encounter when closing a mortgage, and tips on how you might negotiate to lower the overall cost of your new loan.
Origination Fees - This is one of the main ways lenders make profit on the loans they originate. The origination fee is a percentage of the loan amount charged for giving you access to the loan program for which you have applied. The origination fee ranges from 0% to as many as 5% or more, and is usually dependent on the type of loan you are obtaining. Loans for single family homes are standard and carry lower origination fees, while loans for multiple units or commercial property might carry higher origination fees. For example, a $100,000 loan made with a 1% origination fee would cost you $1,000 ($100,000 X 1%). If the origination fee on your loan is too high consider switching programs or asking your lender for a loan without these costs. Most lenders offer at least one program without an origination fee. It might be reserved for borrowers with high credit scores (above 700), but even if your scores are not that high you should ask for a reduction anyway.
Discount Fees - Discount fees are those paid to lower the interest rate normally offered with the loan program for which you are applying. Discount fees are also charged as a percentage of the loan amount. For example, the loan program for which you apply, and for which your credit score makes qualifies you, might carry an interest rate of 6% per year. The lender offers to lower the interest rate by 1% if you pay two (2) discount points. Using the example above, a $100,000 loan with two discount points would cost you $2,000 in discount fees ($100,000 X 2%). This charge would be worthwhile to you as a borrower if the cost of the discount fees would lower your interest rate and monthly payment such that the new payments, over time, would cost less than the cost of the discount fees. For example, if you planned to live in the home for five years, you would pay $2,000 in discount fees if you knew the lower interest rate would cause your payments, over five years, to save you more than $2,000. Discount fees are usually a set formula based on the loan program, but the lender can move on these fees if you ask them. Brokers also charge discount fees, and you might have more success getting your broker to come down in costs than getting your lender to discount their fees.
Title Fees - Title shows a list of people who have an interest in the ownership of your home. If you are the sole owner of your home, your title will show just one name. This is considered clean title. Title fees include the cost of checking the title through public records and making sure the title is clean so the new lender can record a mortgage against it. Title costs are set by the individual title company and while you usually can’t negotiate them, you can shop for a title company that has lower fees. Unfortunately, government recording fees are not negotiable.
Title Insurance - Title searches are not perfect. Sometimes there are errors on the title report or clouds on title can appear after the title was pulled for your new loan but before the loan actually closes. Title insurance can be purchased to protect you against these errors, and to compensate you if one of these errors causes an economic loss to you during the loan transaction. Title insurance is a formula based calculation underwritten by the title insurance company. There is usually profit built into the policy for the insurer so there is room to negotiate here. It may be tough to get to the insurer if the policy is being offered in partnership with your lender, but ask and you might receive.
Recording Charges - The local municipality (city, county, etc.) where the property is located will charge a fee for the lender to record the mortgage on your property. That fee is passed on to you through a recording charge. It can range from just a few dollars to $100 or more. Again, these are set government fees and it will be unlikely that you can negotiate here. Luckily, these fees are a small fraction of the total fees you'll be paying to close a loan.
Transfer Taxes - Another local municipality charge comes in the form of transfer taxes, which is charged on purchases only, not refinances. This tax is usually a small percentage of the value, or purchase price, of the home being bought. These fees are not negotiable, but you may be able to negotiate who pays the fee. In some cities, it may be common for buyer and seller to split these fees.
Deposit for Escrow Account - If your lender requires you to pay mortgage insurance and property taxes with your loan payment each month it will likely require you to fund that account with a deposit until the next loan payments are due. This amount is different for each loan and will be determined on the amount of property taxes and insurance you owe for that property and loan. Read our article about Mortgage Escrow Accounts to learn more.
Daily Interest Charges - Because you don't make a payment on new loans until a month or more into the loan, the lender will also charge you for the interest accrued until that time. The daily interest charges are paid up front at loan close. Daily interest charges will be set once your loan interest rate is set, and the total charge will be determined by the number of days between the time you close the loan and the date of your first monthly payment. While you might not be able to negotiate this charge, you can negotiate the date of loan close and the date at which you will make your first payment, which can help to minimize any interest charges paid up front.
The U.S. Department of Housing and Urban Development (HUD) created a form, called the Good Faith Estimate (GFE), which summarizes all of the mortgage related closing costs in an easy to read manner. The GFE outlines which costs are set and which can change before your loan closes, and the form also makes it possible for you to compare several mortgage offers on one page; which can help you shop for the best loan. For more information on mortgage closing costs and the new GFE, read our article about the Good Faith Estimate.
The best way to get your lender to make a better loan offer is to obtain multiple loan offers from several lenders. If the lenders are competitive, they will fight for your business and come down in price and fees where they can.