Mortgage Closing Costs Explained

If you’re in the process of refinancing your home mortgage loan you might be concerned about the closing costs your lender is quoting you… and rightly so. Mortgage lender junk fees and unnecessary markup will be responsible for American homeowners overpaying nearly sixteen billion dollars this year alone according to the Secretary of Housing and Urban Development. So how can you minimize your closing costs while avoiding unnecessary fees and make sure you’re not part of this statistic? Read on… this article has my best mortgage refinancing tips to help you avoid paying too much for your next home loan.

Mortgage Closing Costs Explained

Closing costs on your home mortgage loan are the fees you’ll pay up-front like home appraisal fees, loan origination fees, title fees, discount points, recording, underwriting, and loan processing fees. These fees are first presented to you on your Good Faith Estimate; however, mortgage lenders and brokers are notorious for low-balling closing costs on the Good Faith Estimate. The only reliable document for scrutinizing your closing costs is the Hud-1 Settlement Statement. This is unfortunate that bait and switch has become common practice in mortgage lending in the United States and ultimately why most of your neighbors overpay for their home loans.

The first closing costs I’m going to explain today technically aren’t a closing cost; however, you still have to pay it at closing and are prepaid interest, taxes and insurance. (You’ll have to pay interest from the day you close until the end of the month at closing making it advantageous to close on the last day of the month.) Your actual closing costs are called “hard costs” and are the fees paid to the mortgage lender or any third party company involved with your closing. These hard fees associated with your mortgage are the origination fee, underwriting fee, and loan processing fee. Anything you pay for title charges are escrow costs and fees paid for title insurance. Any reserves you might be required to pay go to the escrow account to pay your taxes and homeowners insurance premiums. Escrow accounts are how lenders protect themselves by ensuring your property taxes and homeowner insurance is paid on time; a service you’ll have to pay for if escrow is required on your loan.

Mortgage Refinancing Closing Costs

It can be common practice to roll your closing costs into the loan balance when refinancing your home; however, if you do this you’ll be paying these costs over and over again for the duration of your loan…especially if you opt for a no cost mortgage loan. It’s always better to pay closing costs and origination fees up front rather than accepting a higher mortgage rate and loan amount to cover the difference. If you have an escrow account on your original mortgage you cannot transfer it to your new mortgage; you’ll have to create a new escrow account and pay any fees associated with this new account.

Average Mortgage Closing Costs

Closing costs vary from one state to the next and from one lender to the next. Also, if there is an attorney involved your closing costs will be higher. Not including the attorney and mortgage broker fees you could estimate your closing costs anywhere from 1.5% to 2.0% of your loan amount. The origination fee needs to be considered separately because this is charged by your mortgage broker and is frequently overcharged. If your mortgage broker is charging you an origination fee they should not be marking up your mortgage rate for a commission from the lender, which is another topic I’ll get to shortly.

No Closing Costs Mortgage Loans Are a Lie

What about these lenders that advertise no closing costs or a flat $395 fee for their mortgage loans? There’s no such thing as a “No Closing Cost” mortgage loan. Your closing costs, especially the ones paid to third party companies have to be paid no matter what the mortgage lender’s pitching. Carefully read the fine print and you’ll find out that these loan originators are using a fee known as Yield Spread Premium to pay your closing costs.

Yield Spread Premium is a fee paid by the wholesale lender when you accept a mortgage with a higher than necessary mortgage rate. It is a cash percentage of your loan amount, one percent for every .25% you agree to overpay, and results in a higher than necessary mortgage payment. (Several hundred dollars a month or more…) If you want the lowest possible mortgage rate and payment amount you must avoid any form of Yield Spread Premium. It’s not just “No Cost” mortgages that use Yield Spread Premium…at least with these loans the money is going towards your losing costs. There are a whole lot of mortgage brokers out there that pocket this kickback from the lender as part of their commission. Avoiding sleazy mortgage brokers is the one of the topics from my free Underground Mortgage Videos.

What About Mortgage Junk Fees

So how do you know which fees on your Good Faith Estimate and Hud-1 Statement are junk? Most of the third party charges on your Good Faith Estimate that don’t come from the broker are on the level and can’t be avoided. Attorneys, surveyors, and appraisers all need to be paid as part of getting a home loan. Underwriting fees are fairly standard and if you don’t like a particular lender’s underwriting fees you can always go to another lender. As for the junk fees you’re likely to encounter when refinancing your home, they typically come from the loan originator. Your mortgage company or broker is responsible for nearly all of the junk fees out there.

What are mortgage junk fees? We already talked about Yield Spread Premium. Anything resembling a rate lock fee is pure garbage. There isn’t a lender out there that charges a fee for locking in your mortgage rate… if your broker claims there is a fee for rate lock you can be certain you’re dealing with a dishonest mortgage broke. Mortgage broker courier fees are also pure junk. Origination fees and processing fees aren’t junk but are frequently abused. Don’t agree to pay more than one percent for loan origination and any loan processing fee greater than $400 is also garbage.