The Truth About No Cost Mortgages

Even if a bank says you’re getting a “no cost” mortgage – perhaps because they are not charging points on the loan – that doesn’t mean the loan itself is truly “free” or really being offered at zero cost to you.

Banks aren’t in the business of loaning money, and doing all the work required to close a mortgage loan, free of charge. So here are examples of the common fees you might see when you obtain a mortgage – along with estimated costs.

These costs can apply to both initial home purchases and refinanced home loans. Obviously, prices for different products and services can vary based on where you live and other factors. Nevertheless, the numbers presented below will give you an estimate – or in some cases a range – of what you can typically expect to pay for your mortgage.

Typical Closing Costs on a New Mortgage:

Description of Fee Cost

Application Fee                         $150-$400

Appraisal                                  $200-$400

Closing Fee                               $250-$350

Credit Report                            $15-$50

Document Prep Fee                  $150-$300

Flood Certification                     $10-30

Legal Fees                                $250-$750

Loan Origination Fee                 Usually 1% of the loan

Points                                       Each point is 1% of the loan

Recording Fee                           $25-$50

Survey                                      $150-$300

Taxes                                       Varies (See more info below)

Termite Inspection                     $50-$100

Title Insurance                          Varies (See more info below)

Some loan costs – like interest on your loan and property taxes – must be escrowed, meaning that you pay for them for a few months, up to a year in advance. The same is true for homeowners’ insurance, which covers the house in case of a fire or another disaster.

Insurance Costs for Your Home Loan

Other insurance you have to pay includes title insurance, which is an indemnity policy that provides protection against any loss that arises due to problems with the title (or ownership) of your property. Lenders require you to have title insurance because if the title is “faulty” – due to a tax lien, judgment or some kind of encumbrance on the title – then title insurance covers the lender. As is the case with mortgage insurance, you bear the costs of title insurance (in a single, up-front payment), but your lender receives the protection for this coverage.

Title Insurance Varies Based on Several Factors

Title insurance costs vary greatly nationwide, partly because the title insurance premium you pay often covers different services, depending on the company you use and where your home is located. For example, in some places your premium simply covers the lender for any title-related losses. In other places, though, the premium covers losses, as well as the cost of a title search, title examination, and closing services. Title insurance also varies based on the size of the mortgage.

Watch Out for “Junk” Fees Charged By Some Lenders

Junk fees are those charges imposed solely to add to a lender’s profit margins. In many cases, these fees have legitimate or official sounding names, like “document preparation fee.” In truth, however, they’re really just creative ways for lenders to pad their bottom line at your expense. Many lender charges that have the word “fee” slapped on the back of them are a dead giveaway that you’re being charged for services that lenders are supposed to provide anyway. If you get charged for an “underwriting fee,” a “loan review fee,” a “warehousing fee,” or other such nonsense, do not hesitate to ask the lender to waive those fees – or at least substantially reduce them. Even things like the “application fee” or the “loan processing fee” can be eliminated or cut, if you are savvy enough to ask.

How to Decipher Your Good Faith Estimate

When you obtain a mortgage, you will pay four sets of fees: Lender Fees, Title and Third Party Fees, Escrow and Interest Fees, and Government Fees. Each set of fees will be outlined in your Good Faith Estimate. Remember, however, that the GFE is not binding on a lender. In fact, it’s likely to change at least once – right after your loan is approved. Later, when you go to the closing, take your Good Faith Estimate with you and compare it against the final bill you get at closing. That final bill is described as a HUD-1 Settlement Statement. For now, however, let’s take an in-depth look at the fees you’ll pay at closing as revealed in your initial Good Faith Estimate.

  • Lender Fees

Payments you make to a lender in order to obtain a mortgage can range from loan discount points to mortgage broker fees or underwriting costs. In general, lender charges include any fees that go directly to the financial institution providing your home loan.

  • Title and Third-Party Fees

Third-party fees for home borrowers include the costs for flood certification, appraisals, pest inspections, your title search, and title insurance.  Third-party fees are paid to outside vendors or other companies, not your lender. In many cases, however, your lender might be affiliated with those third parties.

  • Escrow and Interest Fees

Lenders often require you to make advance payments into an escrow account to make sure you don’t fall behind on your property taxes, homeowner’s insurance, loan interest, or private mortgage insurance. Other escrow items include so-called “interim,” interest, which is the daily mortgage interest cost you pay from closing through to the end of that month.

  • Government Fees

Most city, county, or state agencies require property transfer taxes or other levies for real estate purchases. Other government agencies charge for your mortgage deed to be recorded. These fees will all be detailed in your Good Faith Estimate. You can tell which fees are likely to be negotiable by carefully reviewing your Good Faith Estimate. On the GFE, you’ll notice that fees are grouped into numerical categories that range from the 800s to the 1300s. Your lender’s charges fall into the 800s category, and will include anything from application fees to loan origination charges or underwriting fees. These are the items that are most open to negotiation.

Questionable Fees You Should Contest

Anything classified as a “review,” an “administrative” or a “document prep fee” should be questioned. Lenders will say that they charge for these items because loans have to be processed, underwritten, and reviewed. However, there’s no justification in charging these junk fees to consumers for several reasons. First, lenders use automated underwriting systems, which spit out approval or denials in a matter of minutes. It’s not as if some underwriter is spending weeks working on your mortgage application. Additionally, administrative and underwriting services are part of the normal course of a lender’s business. Lastly, even if you should have to pay for these expenses – which you shouldn’t – many lenders inflate these charges, saddling consumers with $500 “processing” or “administrative” fees – costs that far exceed the lender’s actual incurred cost.

Fees Required to Be Paid In Advance

Fees that fall in the 900s category on the Good Faith Estimate represent items required by your lender to be paid in advance. Examples include pre-paid interest on your loan, mortgage insurance premium, or a hazard insurance premium. Likewise, fees in the 1000s category on your GFE are for reserves you must deposit with the lender, for expenses like property taxes or flood insurance. Generally speaking, you won’t be able to negotiate away pre-paid costs that your lender mandates. However, you can save money on these items in other ways. For instance, you can schedule your closing toward the end of the month to reduce the number of days of prepaid interest you pay at closing. Also, you can shop around for the best rate on hazard insurance – the cost of which will be listed as item 903 on your Good Faith Estimate.

Beware of Costly Mark-ups

Most title charges and third-party fees will show up on the 1100s section of your Good Faith Estimate. Here you will the costs you must pay for title insurance or for title searches, notary fees, attorney fees, and perhaps other expenses, such as overnight courier service. Sometimes, third-party fees – like charges for an appraisal or the cost to run your credit – might appear in the 800s section instead of in the 1100s area of your Good Faith Estimate. These are legitimate third-party fees because your lender does incur these expenses. However, you have to watch out for lenders or brokers who try to pad these charges and impose a markup on them. To reduce the risk of this, let your lender know upfront (i.e. after you’ve been approved for your mortgage) that you want receipts for all third-party expenses you incur.

In states like Texas and Florida, title insurance premiums are set by the state. But in other places, you can save yourself money by shopping around for title insurance, a title exam, and attorney’s fees. Many lenders will suggest that you use their title company or lawyers, but you don’t have to – especially if you can find better deals on your own.

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