Mortgage Costs: What They Are and How to Reduce Them
Point of Interest: Mortgage Closing Costs
All of the closing costs associated with a mortgage add up fast. Most homebuyers will end up paying at least a few thousand dollars in fees at closing. However, you can reduce your total mortgage costs by comparing lenders, negotiating loan-related fees and shopping around for services to find the best mortgage rates. By being a savvy borrower, you can potentially save yourself hundreds or even thousands of dollars on your mortgage costs.
Mortgage costs, or closing costs, can be a point of confusion, frustration and even surprise during the home buying process. There are tons of different fees that come with borrowing the money for a home, and it can be difficult to keep them all straight. Still, if you figure out what mortgage costs you’re expected to pay and how much they cost, along with a few strategies to save up for them, you can make it through the escrow process without worry.
What are mortgage costs?
Mortgage costs are all the fees associated with the purchase of a home. Some are paid to your lender to process the loan while others are paid to third parties, like attorneys and home inspectors. Most of these costs fall on the buyer, but sellers do sometimes agree to pay a portion of them and they are a part of the sale that is negotiable.
How much are mortgage costs on average?
Mortgage costs vary depending on your state, lender and loan type, so it can be hard to predict exactly what you’ll pay, but on average, closing fees cost buyers between 2% and 5% of the purchase price of their homes. A few days after you send in your completed mortgage application, you’ll receive a detailed loan estimate from your lender that lists all of your closing costs and gives you a price estimate for each one.
Common mortgage costs
There are a number of common mortgage costs that you can expect to see on your loan estimate, including:
Loan-related fees, which are also known as lender fees, are charges associated with processing your loan. They include costs like application fees, underwriting fees, origination charges, appraisal review fees and other charges. Discount points, which are optional fees you can pay to your lender in exchange for a lower interest rate, also fall under this category.
You’ll need to have your new home appraised to determine its value before you can close on your loan. It will also need to be inspected to make sure there are no structural issues. The charges for all of these services, from pest inspections to surveys, are called property-related fees. HOA dues, which some buyers have to prepay at closing, are also considered property-related expenses.
Title and title-company fees
Title fees are costs associated with performing a title search on your home and purchasing title insurance. A title search is carried out to make sure that there are no liens on the home or disputes over its ownership. Title insurance protects both you and your lender from financial losses due to ownership claims or other title problems that may arise in the future. Escrow and recording fees also fall under this category. Escrow fees cover the cost of hiring an attorney or agent to manage the transfer of funds during the closing. Recording fees are costs associated with registering you as the new owner of your home at the courthouse.
Mortgage insurance and other fees
If you’re putting less than 20% down on a loan you’ll probably need to pay for PMI insurance. It’s a type of mortgage insurance that protects the lender in case you default on your loan. If PMI is required, you’ll need to pay a mortgage insurance premium at closing and will continue to pay for PMI along with your loan payments each month.
VA loans are an exception to this rule. They don’t require a down payment or private mortgage insurance, which is one of their key benefits. They do, however, require a funding fee, which is a percentage of your loan amount that’s due at closing, plus you will have to meet the requirements for this type of loan, which is meant for military members and their families.
No matter what type of loan you have, you’ll also probably have to pay several months of homeowner’s insurance and property taxes at closing. These fees can amount to thousands of dollars, so make sure you save up for them.
How to save on mortgage costs
If you’re putting 20% down, it can be tough to save up enough money to cover both your down payment and closing costs. However, there are ways to save on mortgage fees and reduce your total up front costs, including:
Compare lenders and negotiate fees
Some lenders will give you a loan estimate form before you apply for a mortgage to help you comparison shop. You should get a form from each lender you’re interested in and look over it carefully. Sometimes lenders will overcharge you or pad their estimates with unnecessary fees. Ask potential lenders about any fees that seem vague or expensive — many times they’ll eliminate or reduce them to get your business.
Shop around for services
You can also negotiate on some third party fees. There’s a section on your loan estimate form that indicates which services you can shop around for to reduce your costs. Some of these services include pest inspections, surveys, title searches, title insurance and escrow fees.
Search for rebates
Some banks will offer customers rebates when they buy a home, especially if you’re already one of their customers. Bank of America, for example, offers preferred members a $200 to $600 reduction in their mortgage origination fee. Alliant Credit Union also offers buyers a rebate of up to $6,500 for purchasing a home through its Home Rewards Program. The program pairs buyers with a local real estate agent and loan officer to make the home buying process go smoothly.