Those Mysterious Mortgage Closing Costs

Additional costs and closing fees can be the most misunderstood part of a mortgage package because new homeowners often don't know what costs are standard and which ones are not necessary.

This page:

  • Lists the one-time costs you are most likely to encounter

  • Describes why lenders and other agencies charge these fees

  • Explains which fees must be paid and which ones you can avoid

We have yet to discuss various recurring costs. If you've missed it, in the previous pages we've covered interest rates, points and rebates (what are they?), your down payment, and PMI. You can start from the beginning of our mortgage package section for a look at all costs and fees.

If you missed it, the first part of this Mortgage Basics guide explained what a mortgage is, how interest rates are set, and how the differences between various mortgage types affect you.

Will you have to pay all those "closing costs"?

By definition, closing costs are fees you pay only once, at closing. They include 3rd party, government, title, and lender fees.

Third party fees are monies paid to outside parties for performing services necessary for buying a home. These include property appraisals, credit reports and sometimes flood inspection (different states have different requirements).

Government fees include taxes and recording costs. These are unavoidable, and you have to pay them regardless of your credit or any other factors. They also vary from state to state.

You'll also be charged for title search and insurance. These protect you and the lender from the possibilities that the seller does not actually own the property or that there is some encumbrance against it. This could be a second mortgage, a lien, unpaid taxes, pending legal actions, zoning ordinances, a restrictive covenant, or some other claim.

Title search and insurance, 3rd party fees, and government costs are basically standard and non-negotiable.

Lender fees may be more flexible.
Traditionally lenders have charged a whole array of extra fees for their services. Fees for loan origination, document preparation, underwriting, loan processing, application, and lender's attorney, among others, are all commonly added lenders' fees. They're often referred to as "garbage fees," because they really serve no purpose.

It's important to differentiate these "garbage fees" from the necessary 3rd party fees like appraisal and recording costs. Unscrupulous lenders often try to pass off lending fees as unavoidable as well. But you can escape them and save yourself thousands of dollars.

Fortunately for borrowers, the competition brought on by the growth of online mortgage processing has eliminated the need to pay many of these fees. In fact if your credit history is good, and you get pre-qualified at Eloan you will not pay any closing fees at all.

If your credit is not as good, you may have to pay some closing costs, though not nearly as many as you would pay by applying with traditional off-line lenders.

The sub prime lender we recommend, FullSpectrum offers very flexible low-fee mortgages, which help build your credit while also adding to your equity.

Next: Recurring costs - those you'll keep paying on your mortgage

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