Mortgage Closing Costs 101

At some point in time, virtually everyone will have to deal with a mortgage. A mortgage is usually the largest financial transaction that we make in our lives. Understanding all the costs associated with a mortgage transaction is very important.

Points: Points are fees that are either paid to the lender or to the mortgage broker. Points are assessed as a percentage of the loan amount.

Origination Fees: If the points are paid to the broker, or to a mortgage company, they are called a loan origination fee. This is the primary way that brokers and mortgage companies make their money.

Discount Points: If the points are paid to the lender as discount points, this means that the borrower is paying an extra fee to get a lower interest rate. This is also known as "buying the rate down".

Appraisal Fee: When the property is appraised, the Appraiser charges a fee, usually $350 to $500. In many cases, the mortgage company or mortgage broker will require that this fee be paid up front by the borrower.

Processing Fee: This is a flat fee charged to "process" the loan---handle all the paperwork, etc. This fee can range anywhere from $150 to $500.

Underwriting Fee: This is a flat fee charged by the lender to underwrite the loan. This fee is usually seen on loans that are originated by a broker and underwritten by a wholesale lender.

Title Insurance: This fee is universal for mortgages in all states. Title insurance insures the borrower against defects in the title of the property. On all loans, a title company will do a title search, verifying who is on the title to the property and how many liens of what amount are on the property. Title insurance rates will vary from state to state and company to company, but they are all based on the loan amount---the larger the loan, the more the title insurance will cost.

Closing Fee: This is a fee paid to the person or company who "closes" the loan, or who sits down with the borrowers and explains what documents they are signing. This fee is usually $150 to $250.

Filing Fees: All states and counties have fees associated with filing a mortgage, based on loan amount. Some states will have an additional mortgage tax.

Yield Spread Premium(YSP): YSP is a fee paid from the wholesale lender to the broker or mortgage company. The YSP is a bonus that the wholesale lender pays the broker or mortgage company for selling the customer a higher interest rate than they qualify for. The YSP is paid outside of the loan and is not part of the loan amount. In most states, mortgage brokers have to disclose a range for the YSP, but many mortgage bankers and mortgage companies do not have to disclose the YSP at all.

This is not a comprehensive list of closings costs, but this does cover the most common and most important types of closing costs. Keep in mind that closing costs will vary by loan type, by state, and by the broker or mortgage company doing the loan.

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