When you apply for a mortgage, the lender will likely charge you various fees and costs. These costs are how lenders make money up front on your mortgage. In this article, we’ll explore the different ways lenders make money up front and what you can do to minimize your costs.
Origination Fees
One of the most common ways lenders make money up front is through origination fees. These are fees charged for processing your mortgage application and creating your loan. Origination fees are typically a percentage of your loan amount, and they can range from 0.5% to 1% or more.
Origination fees can be a significant cost, but they are negotiable. You can ask your lender to lower or waive the fee, especially if you have good credit or are a repeat customer.
Discount Points
Another way lenders make money up front is through discount points. These are fees you pay upfront to reduce your mortgage interest rate. Each point is equal to 1% of your loan amount, and each point typically reduces your interest rate by 0.25%.
Discount points can be a good option if you plan to stay in your home for a long time, as they can save you money on interest over the life of your loan. However, they can also be a significant cost upfront. Make sure you consider your long-term goals and your budget when deciding whether to pay discount points.
Application Fees
Some lenders may charge an application fee when you apply for a mortgage. This fee covers the cost of processing your application and may be non-refundable if your loan is not approved. Application fees can range from $50 to $500 or more.
Application fees are not common, but if your lender charges one, make sure you understand the terms before you apply. Some lenders may waive the fee if you agree to a higher interest rate or other terms.
Underwriting Fees
When you apply for a mortgage, the lender will need to verify your income, employment, and other financial information. This process is called underwriting, and some lenders may charge a fee for it.
Underwriting fees can range from a few hundred dollars to over $1,000, depending on the lender and the complexity of your application. Some lenders may waive the fee if you have good credit or agree to a higher interest rate.
Appraisal Fees
Before you can get a mortgage, the lender will need to know the value of the property you’re buying. This is done through an appraisal, which is an evaluation of the property’s worth. Appraisal fees can range from $300 to $500 or more.
Appraisal fees are typically paid by the borrower, but some lenders may cover the cost. Make sure you understand who is responsible for the appraisal fee before you apply for your mortgage.
Home Inspection Fees
Some lenders may require a home inspection before approving your mortgage. This is to ensure that the property is in good condition and doesn’t have any major problems that could affect its value. Home inspection fees can range from $300 to $500 or more.
Home inspection fees are typically paid by the borrower, but some lenders may cover the cost. Make sure you understand who is responsible for the home inspection fee before you apply for your mortgage.
Closing Costs
When you close on your mortgage, you’ll need to pay various closing costs. These can include title fees, recording fees, attorney fees, and more. Closing costs can range from 2% to 5% of your loan amount or more.
Closing costs are a significant cost, but they are negotiable. You can ask your lender to lower or waive some of the fees, especially if you have good credit or are a repeat customer.
Conclusion
As you can see, lenders make money up front on your mortgage through various fees and costs. However, many of these fees are negotiable, and you can often lower or waive them with some negotiation. Make sure you understand all the fees and costs associated with your mortgage before you apply, and be prepared to negotiate to get the best deal.