Mortgage Fees Explained!
One of the most common questions I hear when buying a home is “What are your closing costs for a mortgage?”
This is a very good question and as a consumer I would want to know this as well. This would be a significant part of what helped me make my decision. I have made a list of all the costs and fees associated with getting a mortgage. This list should help you understand the “Good Faith Estimate” that you receive from us listing the fees.
Recurring Closing Costs –
These are costs that “recur” every year – Recurring costs should actually be named Homeowner expenses paid in advance. These are also commonly called Pre-Paid Items. These items include the following:
Hazard Insurance (Homeowners Insurance)– one year in advance + 3 months reserves (reserves needed if impounding which is a requirement on all loans that exceed 80% LTV)
Property Taxes - Pro-rated taxes based on purchase date + specified number of months to be impounded determined based on the month that you close. EX. July = 7 months taxes in advance
Pro-rated Interest – This is your first month’s mortgage in advance. It will be pro-rated from the date of close to the end of that month. Your first payment will be the following month on the first. EX. July 15th close date would require 16 days pro-rated per diem interest calculated on your interest rate. You would then have a first payment date of September 1st.
Mortgage Insurance – Although this is not as common, some lenders will ask for 1 month mortgage insurance in advance.
Miscellaneous – If there is a Homeowners association you may be required to pay a month or two upfront as well.
Non-Recurring Closing Costs –
These are the expenses that we are trying to get the seller to pay. These are the one time fees that you have been putting money in the piggy bank for. You will not have to pay these fees ever again unless you buy another home or refinance your existing mortgage. These include but may not be limited to the following:
Origination – This is what the broker or the loan originator charge you to do your loan. Generally 1% on all FHA deals. This does not have to be a fee that you pay but your interest rate will be higher if you choose not to pay it.
Discount Points- Discount Points are paid to the investor to obtain a lower rate. Basically you are pre-paying your interest. If you are willing to pay more money up front to the investor then they are willing to discount the note rate. This process lowers your monthly payment but increases the upfront costs of the loan. Discount will be made payable to the wholesaler that you are obtaining the loan through. Talk to your Lender, but most of the time it’s a good idea to pay discount points when purchasing a home. It can be a good idea sometimes when you are refinancing your current mortgage.
Broker Costs – US Lending< charges its borrowers $745 for processing of your loan. Many brokers will charge processing, admin, broker fee or many other miscellaneous. When in doubt ask.
Wholesaler Costs – Generally the wholesaler that will actually fund the money for you charges an Underwriting fee $750-$850, wire fee, tax service and a MERS which is electronic registration.
Appraisal – For Conventional loans done through HVCC and for FHA through an independent appraiser.
Credit – There is a cost for the Credit Report through a third party generally collected at the time of application, but can be charged at closing.
Title and Escrow Fees – This is a third party gatherer of the docs. They will collect monies, sign the loan document, provide a preliminary title report, draw up the estimated settlement statement etc. There fees are determined by the loan amount and purchase price. The standard fees that are charged include but are not limited to: Title Insurance, escrow fee, doc prep, notary, Recording, courier, endorsement and other miscellaneous expenses.
I have found that Non-recurring costs generally run between 2.5-3% of the purchase price when you pay an origination of 1%. The lower the loan amount the higher that figure can be because there are set cost ie: $695 processing that is a higher percentage of 100K than it is of 200K.
Recurring Costs depending on the month and the amount of property taxes can range from 1-1.5% of the purchase price.
It is important to know the difference between recurring and non-recurring closing costs and have an understanding of who is going to pay what. You are responsible for the down payment and all of the costs recurring and non-recurring that the seller does not credit for. If you are worried about coming up with all these costs, talk to your lender because most of the time the loan can be structured to either cover the costs, or we can have the sellers pay for a large portion of them.
EX: FHA PURCHASE 3.5% down payment requirement
100K Purchase Price – Down Payment $3500 (minimum statutory investment required by HUD)
Recurring Costs 1.5% or $1,500
Non-recurring Costs 2.5% or $2,500
Seller Agrees to Pay 3.5% toward closing or $3,500
Borrowers Estimated Cash to close would be Down Payment $3500 + Recurring Closing Costs $1500 + Non-recurring Closing Costs $2500 – Seller Credit $3500 = (3500 + 1500 + 2500) -3500 = $4000 cash out of the borrowers pocket. In this example the seller paid for all the Non-recurring costs and 1% of the recurring closing costs leaving the buyer responsible for down payment and .5% of the recurring costs or Homeowner expenses in advance.
*****Disclaimer – The Examples illustrated in the post are merely to show you and example and may not represent your transaction. The purpose of this post was to explain the difference between loan costs and pre-paid homeowner expenses. If you have any questions regarding items in this post please add them in the comment section or call your Loan Officer.****
