8. Understanding Loan Fees

by Local Title

When securing a loan, it’s crucial to understand the various fees associated with borrowing money. These fees can significantly affect the overall cost of the loan and your monthly payments. Here’s a detailed guide to help you understand the different types of loan fees you may encounter.

Origination Fees

Definition

Origination fees are charged by the lender for processing your loan application. These fees cover the administrative costs of underwriting and funding the loan.

Amount

Origination fees typically range from 0.5% to 1% of the loan amount, but they can vary depending on the lender and type of loan.

Application Fees

Definition

Application fees are charged by some lenders to cover the cost of processing your loan application and conducting a preliminary credit check.

Considerations

Not all lenders charge application fees, so it’s worth shopping around to find lenders who offer free applications.

Appraisal Fees

Definition

For secured loans, such as mortgages, lenders require an appraisal to determine the market value of the property being used as collateral.

Amount

Appraisal fees can range from $300 to $500, depending on the property size and location.

Credit Report Fees

Definition

Lenders will pull your credit report to assess your creditworthiness. This fee covers the cost of obtaining your credit report from the credit bureaus.

Amount

Credit report fees are usually between $15 and $30.

Title Fees

Definition

Title fees cover the cost of a title search and title insurance, ensuring that the property is free of liens and legal claims.

Components

  • Title Search Fee: The cost of examining public records to verify the property’s legal ownership.
  • Title Insurance: Protects the lender and borrower against any future title disputes.

Amount

Title fees can vary widely but generally range from $500 to $1,000.

Underwriting Fees

Definition

Underwriting fees are charged by the lender to cover the cost of evaluating and verifying your loan application and financial information.

Amount

These fees typically range from $400 to $900.

Closing Costs

Definition

Closing costs are a collection of fees and charges that must be paid when the loan is finalized. They include various costs associated with the loan transaction.

Components

  • Attorney Fees: Legal fees for preparing and reviewing loan documents.
  • Recording Fees: Costs for recording the loan and property documents with the appropriate government office.
  • Escrow Fees: Fees for holding funds in escrow until the transaction is completed.
  • Survey Fees: Costs for verifying property boundaries and dimensions.

Amount

Closing costs can vary but typically range from 2% to 5% of the loan amount.

Discount Points

Definition

Discount points are optional fees paid upfront to the lender in exchange for a reduced interest rate on the loan.

Calculation

One discount point equals 1% of the loan amount. For example, on a $200,000 loan, one point would cost $2,000.

Considerations

Paying points can save you money over the long term by lowering your interest rate and monthly payments, but it increases your upfront costs.

Prepayment Penalties

Definition

Some loans include prepayment penalties, which are fees charged if you pay off the loan early. Lenders impose these penalties to recoup some of the interest they lose from an early payoff.

Amount

Prepayment penalties vary widely and can be a percentage of the remaining loan balance or a set number of months’ worth of interest.

Mortgage Insurance

Definition

For mortgages, if you put down less than 20% of the home’s purchase price, you may be required to pay for private mortgage insurance (PMI). This insurance protects the lender in case you default on the loan.

Amount

PMI can range from 0.3% to 1.5% of the original loan amount per year.

Servicing Fees

Definition

Some lenders charge servicing fees for managing your loan account. These fees cover the cost of loan administration, such as sending statements and processing payments.

Amount

Servicing fees are generally a small monthly charge, often around $25 to $50.

Understanding loan fees is essential for making informed borrowing decisions. By knowing the types of fees you may encounter, you can better compare loan offers and calculate the true cost of a loan. Always ask lenders for a detailed breakdown of fees and factor them into your overall loan costs to avoid any surprises.