Before taking out a mortgage loan, you should have good knowledge about the pricing of the mortgage product. If you know how a mortgage loan is priced, you won't be surprised by any hidden costs inherent in it. Here, it is to be noted that all the costs associated in a mortgage loan are contained in the Good Faith Estimate (GFE). GFE gives you a very good idea on the pricing of a mortgage loan. GFE gives you the idea about the total payments that you have to make at the time of closing of the loan as well as the monthly payment that you will have to make. Costs involved in a mortgage loan can be divided into two categories – costs which are set by the lender and the costs which are set by the third parties.
Costs which are set by the lender
For different loan offers, fees set by the lender differ. Fees set for comparable loan also vary across lenders. Here we discuss about the fees set by the lenders.
- Rate of interest
Rate of interest is the cost of borrowing money. Rate of interest actually determines your monthly repayment amount. Quite simply, higher mortgage rate implies higher monthly payment and vice versa. - Mortgage origination fees
For the origination of a mortgage loan, lender charges some fees. Loan origination includes processing a loan application and to finally offer the loan to the borrower. - Discount points
Discount points are kind of pre-paid interest. By paying the discount point (usually in lump sum amount), you can lower down the mortgage rate of interest. However, paying the discount point system is not offered by all lenders. - Miscellaneous fees
Various other fees are charged by the lender. These include underwriting fee, application fee, loan processing fee, document preparation fee etc.
Costs which are set by the third parties
There are some costs involved in a mortgage loan which are not set by the lender. Rather these costs are set by the third parties.
- Appraisal and inspection fees
Home appraisal and inspection are part of a mortgage loan process. Fees charged by the appraiser and the inspector can't be controlled by the lender. - Title fees
Title fees are charged for title searching and for checking the ownership of the property. - Property transfer taxes
When the ownership of a property is transferred from one party to another, property transfer taxes are charged by the respective states. Lenders have no say on this. - Hazard insurance
Insurance is required to protect your property from natural hazards such as flood. You are required to pay hazard insurance premiums.
These are the main costs involved in a mortgage loan. You can have a look at the annual percentage rate (APR) of a mortgage loan. APR is a better reflector of the true price of a loan as in addition to the mortgage rate of interest, it includes some additional costs too.