You’ve finally found your dream home. Now, you just need to finance it. Most home buyers are astounded by just how many closing costs are in the final deal. Although these closing costs vary by state, what buyers really need to understand is that some of the costs are disputable and some are negotiable.
The nebulous charges or fees that are commonly associated with mortgage loans are often referred to as junk fees or garbage fees. Some lenders, for example, might present you with a low percentage rate offer that has an extraordinary amount of junk fees. If you don’t understand what these junk fees are and mean, then you might be taking a loan that isn’t the best option for you.
It’s of the utmost importance that you work with a reputable loan officer. You might want to ask for previous client recommendations and check the internet for any negative information associated with the lender. Hidden costs being disguised as something else isn’t a rarity. These might be visibly added into the closing costs, but unless you’re careful, you could mistake them for something else.
Within three days of applying for the loan, your lender should give you a good faith estimate. From the good faith estimate, you will know what your APR (annual percentage rate) will be. You will want to find out what costs have been included in the APR, especially if it seems abnormally high. A good faith estimate is essentially a listing of the closing costs that will be needed to secure the loan. You should carefully assess each item for validity, while also attempting to negotiate better terms on other items.
For a general primer on mortgage basics, see Understanding Home Loans and Mortgages.
Common fees in a good faith estimate
- Loan Origination Fee. Most mortgage brokers and lenders will have some sort of loan origination fee. It may be included in the APR or shown as a separate charge. The amount often varies based on how much work the lender or broker did to secure your financing.
- Application Fee. An upfront fee that often covers the cost of appraisal and pulling your credit report. Some lenders will refund this fee if your application is denied.
- Attorney Fees. Attorneys may represent you during the mortgage process, notarize closing documents, record information with the county, and facilitate the closing; the fee covers those services.
- Document Preparation Fees. Charges for preparing mortgage and closing documents; sometimes these are included under application or attorney fees, so check for duplicate billing.
- Processing Fee. Often a way lenders recover overhead; it can be similar to an additional origination charge.
- Discount Points. Fees equal to a percentage of the loan (commonly one point = 1% of loan amount) paid up front to lower the interest rate over the life of the loan.
- Mortgage Insurance. Required if your down payment is under a typical threshold; this may be paid at closing or collected monthly through escrow.
- Escrow Account. Funds held by the lender to pay property taxes and insurance on your behalf; part of your monthly payment may fund this account.
- Pre-Paid Interest. Interest that accrues between closing and the first monthly payment; timing the closing near month-end can reduce this amount.
- Title Insurance. Protects against title defects or claims; sometimes the seller covers it, but often the buyer pays for the policy.
- Flood Certification Fee. Confirms whether the property is in a federally designated flood zone.
- Pest / Termite Inspection. Covers infestations, water damage, and wood rot that may affect the property’s condition.
- Surveyor Certificate. Defines property boundaries when an existing survey is outdated or missing.
If you’re concerned about how credit affects the mortgage terms you can get, review Understanding the Impact of Credit Scores on Mortgages.
Frequently Asked Questions
What is a good faith estimate and when should I receive it?
The good faith estimate (or Loan Estimate) lists expected closing costs and must be provided by the lender within a few business days of application so you can compare loan offers.
Can I negotiate closing costs with the lender or seller?
Yes—many fees are negotiable or can be shared with the seller, but some mandatory costs (like certain insurance or taxes) have less flexibility.
What are discount points and when do they make sense?
Discount points are prepaid interest that lower your interest rate; they can be worthwhile if you plan to keep the mortgage long enough to recoup the upfront cost.
How can I spot and avoid junk fees?
Carefully review the Loan Estimate line by line, ask the lender to explain unclear charges, and compare multiple offers to identify unusually high or redundant fees.