Mortgage Loan Fees & Closing Costs Explained

Below is a breakdown of the most common mortgage-related fees, including those paid before closing, those due at closing, and how compensation structures (Borrower Paid vs. Lender Paid) can affect your costs and interest rate.

🧾 Fees Paid Prior to Closing

These are typically out-of-pocket expenses paid early in the mortgage process:

1. Credit Report Fee

• What it is: The cost to pull your credit report from all three major credit bureaus.
• Purpose: Lenders use this report to assess your creditworthiness, determine eligibility, and price the loan accordingly.
• Typical Range: $89-$95

2. Appraisal Fee

• What it is: A professional evaluation of the home’s market value, conducted by a licensed appraiser.
• Purpose: Ensures the home is worth the amount you’re borrowing; protects both you and the lender from overpaying.
• Typical Range: $400 – $700      Re-Inspection (if required): $150-$250
• Example: On a $350,000 home, if the appraisal comes in at $340,000, the loan amount may need to be adjusted, or negotiations reopened. Appraisal value needs to come in at or higher than the sales price.

3. Home Inspection Fee (Optional but Highly Recommended)

• What it is: A detailed inspection of the home’s structural, mechanical, and safety components.
• Purpose: Identifies potential issues (e.g., roof damage, foundation cracks) before you finalize the purchase.
• Typical Range: $300 – $600
• Note: While not required by all lenders, this is an important step to protect your investment. Remember, some lenders may require this for certain programs.

4. Down Payment Requirements

💼 Closing Costs

Closing costs are fees paid at the time of finalizing your mortgage and transferring ownership of the home. These typically total 2% to 5% of the home’s purchase price and may vary by location, loan program, and service providers.

Here’s a more detailed look at typical items included:

1. Origination Fee

• What it is: Charged by the lender for processing and originating your loan.
• Typical Range: 0.5% – 1% of the loan amount
• Example: On a $300,000 loan, this could be $1,500 – $3,000.

2. Discount Points (Optional)

• What it is: Prepaid interest used to “buy down” your interest rate.
• Cost: One point = 1% of the loan amount.
• Example: Pay $3,000 upfront on a $300,000 loan to reduce your rate from 6.5% to 6.25%, potentially saving thousands over the life of the loan.

3. Title Insurance & Title Services

• Title Search: Verifies legal ownership and ensures there are no liens or claims on the property.
• Lender’s Title Insurance: Required by your lender; protects against future title issues.
• Owner’s Title Insurance (Optional but Recommended): Protects you, the buyer, against title disputes.
• Typical Cost: $500 – $2,000, depending on location and property price.  Average 0.5%-1% Sales Price.

4. Escrow or Settlement Fee

• What it is: Paid to the escrow or title company for managing the closing process and disbursing funds.
• Typical Cost: $400 – $900

5. Recording Fees

• What it is: Charged by the county to record the deed and mortgage documents in public records.
• Typical Cost: $50 – $250

6. Prepaid Interest

• What it is: Covers daily interest from the closing date through the end of that month.
• Example: If you close on the 20th of the month and your first payment isn’t due until the 1st, you’ll pay interest for those 10–11 days upfront.

7. Property Taxes and Homeowner’s Insurance (Escrows)

When it comes to homeowner's insurance (HOI) and closing costs, the amount paid at closing typically includes both an upfront premium and an escrow account deposit. Here's how it generally breaks down:

·         Upfront Premium: Lenders usually require borrowers to pay the first year's homeowner's insurance premium in full at closing. In this example, this would be $3,000. This is included as part of the closing costs.

·         Escrow Account Deposit: Lenders often require an escrow account to be set up to ensure that property taxes and insurance premiums are paid on time. For homeowner's insurance, lenders typically collect a few months' worth of premiums to start the escrow account. This is often 2 to 3 months' worth, but it can vary based on the lender's requirements and the timing of the insurance payment schedule.

o   Assuming the lender requires 2 months' worth of insurance premiums for the escrow account, you would pay an additional $500 at closing ($3,000 annual premium / 12 months = $250 per month; $250 x 2 months = $500).

·         Total at Closing for HOI:
- Upfront Premium: $3,000
- Escrow Account Deposit: $500 (assuming 2 months)

Total Amount Paid at Closing for HOI: $3,500
Please note that the exact amount for the escrow deposit can vary, so it's important to confirm the specific requirements with the lender..

🏠 Who Pays for Closing Costs?

While many of the fees are the responsibility of the buyer, some may be negotiated. For instance:

• Buyers typically pay lender-related costs, prepaid taxes and insurance, and title services.
• Sellers can contribute to buyer’s closing costs through a concession. This is negotiated in your purchase contract.
• Lender Credits: Some lenders may offer to cover a portion of your closing costs in exchange for a slightly higher interest rate.

We’ll work together to estimate your total out-of-pocket expense early in the process using a Loan Estimate (LE), which clearly itemizes these fees.

💡 Compensation: Borrower Paid vs. Lender Paid

Mortgage brokers are compensated for facilitating the loan. That compensation can be structured in one of two ways:

Borrower Paid Compensation (BPC)

• Paid by: You, the borrower.
• Where it appears: As a line item in your closing costs.
• Impact: Higher upfront costs, potentially lower interest rate.
• Example:
• Loan Amount: $300,000
• Broker Compensation: 2% ($6,000)
• Rate: 6.5%
• Monthly Payment (P&I): $1,896
• You pay the $6,000 at closing.

Lender Paid Compensation (LPC)

• Paid by: The lender.
• Where it appears: Not charged to you directly; instead, it’s built into your interest rate.
• Impact: No broker fee at closing, but slightly higher interest rate.
• Example:
• Loan Amount: $300,000
• Broker still earns 2% ($6,000), but the lender covers it.
• Rate: 6.75%
• Monthly Payment (P&I): $1,946
• You pay $0 in broker fees at closing, but your monthly payment is about $50 higher.

💡 Which one is better?
It depends on your financial goals. If you want to keep your closing costs as low as possible, LPC might make sense. But if you plan to stay in the home long-term and can afford a bit more upfront, BPC may save you more over time.

✅ What Happens Next?

If you’d like, I can run both compensation scenarios side by side and show you how they affect your monthly payments, interest paid over time, and cash to close. We can also explore seller credits or lender credits to help reduce your out-of-pocket costs. The costs above are in addition to your Down Payment, if one is required with your loan program.

Please don’t hesitate to reach out with any questions. I’m here to make the process as transparent and stress-free as possible. Together, we can make a plan that makes sense for your unique situation.

Best regards,
Christopher Smith
Mortgage Loan Originator
NMLS #2528342
Licensed in Oklahoma, Texas, and Arkansas