Whether you are buying your first home or have purchased and refinanced several homes over the years, you no doubt are making your best effort to budget and plan financially for your mortgage. The most obvious expense associated with a mortgage pertains to the regular monthly obligation of your mortgage payment. However, a mortgage also comes with various loan fees and closing costs. Some of these are required to be paid at the beginning of the loan process, and others will be paid at the closing table. While effort is made to fully disclose these fees and costs to a mortgage applicant, there are some hidden costs and fees that often take a mortgage applicant by surprise.
Taxes and Insurance
Many mortgage lenders require you to establish an escrow account when you open a new loan. This escrow account will be used to pay for property taxes and interest, and lenders generally prefer to keep approximately three to six months’ worth of property taxes and homeowner’s insurance payments in the escrow account. The actual amount collected from you, however, will vary based on the time of year it is and the lender’s requirements. A collection of several months’ worth of property taxes and homeowners insurance is a significant expense that is often overlooked.
Loan Origination Fees
A loan origination fee is a fee that a broker charges you to work on your loan, and some lenders will also charge this fee. Some may call it an origination fee, and others will call it a generic loan fee or a lender fee. In some cases, this is a flat fee that is easy to budget for. However, it is common for this fee to be listed as a percentage of the loan amount. A seemingly small percentage, such as one or two percent, may be overlooked by a typically borrower as a small fee. However, in reality, a one or two percent fee can be rather significant.
Loan points or “buydown” points are often tacked onto a loan in order to reduce the interest rate. Some lenders and mortgage brokers will advertise a very low interest rate that has several loan points tacked onto it. You may believe that you are getting a great deal on your loan request because of the unbeatable interest rate you are receiving. However, the loan points that are being used to buy down the interest rate will generally need to be paid at closing, and these typically will range from a half a percent to two percent or more. The cost of loan points coupled with other closing costs and fees can be expensive.
It is common for total loan costs on a typical loan to be approximately three to five percent of the loan amount. However, there is a great deal of flexibility and variation in this area. Some fees are negotiable, such as loan origination fees, and some borrowers have been able to reduce their closing costs through negotiation. Other fees may be needed. For example, mortgage protection insurance or a borrower may need to buy down the interest rate with a loan point in order to qualify for the loan amount needed. Regardless of the total loan costs, these expenses and fees ultimately can catch you off guard if you have not planned for them. With this in mind, ask your lender or mortgage broker for an estimated closing statement very early on in the loan process. If any factors change during the loan process, request an updated estimated closing statement. This effort can help you to better plan for the closing costs and fees associated with your loan.