Definitions
Loan Origination Points or Mortgage Broker
Fee
About seventy percent of loans are originated through mortgage
brokers. Wholesale lenders offer lower costs/rates to mortgage
brokers than you can obtain directly, so you are not paying "extra" by
going through a mortgage broker. Many lenders are wholesale
only and do not have retail divisions for the public. The
loan origination fee is measured in "points." One
point is equal to one percent of the mortgage loan.
Loan Discount Fee
Discount points are often used to describe a type of fee
that lenders charge. Discount points are additional funds
you pay the lender at closing to get a lower interest rate
on your mortgage. A point equals 1 percent of the loan
amount. So, if you and your lender agree to a mortgage
of $100,000, one point would equal $1,000.
Typically, each point you pay for a 30-year
loan lowers your interest rate by .25 of a percentage point.
If the current interest rate on a 30-year mortgage were
7.75 percent, paying one point would lower the interest
rate to 7.50.
Ask your loan officer if you have the option
of paying 1, 2, or 3 discount points – or you can
choose not to pay any discount points. It often makes more
sense to pay discount points if you plan to stay in your
home for a long time.
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Appraisal Fee
Since your property serves as collateral for the mortgage,
lenders want to be certain of the value and they require
an appraisal. The appraisal determines if the value of
the home is justified by recent sales of comparable properties.
Unique and more expensive homes usually have a higher appraisal
fee.
Credit Report
As part of the underwriting process, the lender will want
to review your credit history. This is the fee paid to
obtain a report of an individual's credit history prepared
by a credit bureau and used by a lender in determining
a loan applicant's creditworthiness.
Tax Related Service Fee
To make sure your property taxes are paid on time, the lender
hires a tax service company to monitor your tax payments.
This is how your lender makes sure the government doesn't
need to sell your home to pay back taxes.
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Processing Fee
The fee paid usually to the broker for the processing of
your loan.
Underwriting Fee
The fee paid usually to the lender for the process of evaluating
a loan application to determine the risk involved for the
lender. Underwriting involves an analysis of the borrower's
creditworthiness and the quality of the property itself.
Wire Transfer Fee
Mortgage lenders generally wire the funds to the escrow company
handling the loan closing. Funds are wired through the
Federal Reserve System and done through commercial banks
that are members of the Federal Reserve Bank. Usually,
banks charge mortgage lenders a fee for the wire transfer
service.
Closing or Escrow Fee
The fee paid to an independent third party who acts as the
agent for buyer and seller, or for borrower and lender,
carrying out instructions of both and disbursing documents
and funds. Escrow closes and the transfer of property or
document is completed upon fulfillment of certain conditions
specified in the written instructions, whereupon the necessary
deeds and other instruments are recorded.
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Document Preparation Fee
Either the escrow company or the lender may charge this fee.
Once underwriting has approved your loan, the legal and
miscellaneous documents required at closing must be prepared.
The lender may charge a fee for the preparation of the
mortgage note, deed of trust, Truth in Lending forms, and
escrow instructions. The escrow company may charge for
the preparation of other documents required to conclude
your transaction.
Notary Fees
Most sets of loan documents have two or three forms that
must be notarized. Usually your settlement or escrow agent
will arrange for you to sign these forms at their office
and charge a notary fee as prescribed by California law.
Title Insurance
Your lender will require that you buy title insurance to
ensure that you are receiving a "marketable title." There
are two types of title insurance policies:
Lender’s policy (mandatory): This protects
the lender should a flaw in the title be detected after
the property has been purchased.
Owner’s policy (optional, but recommended): This
protects you should a flaw in the title be detected after
the property has been purchased.
Generally, in the case of a purchase transaction,
the buyer pays the cost of both policies. Check with your
insurer, because you may receive a price break if you seek
a combined lender/owner policy or if you purchase a "reissue" policy
from the company that previously insured the title.
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Recording Fees
The fees paid for the filing of documents affecting real
property as a matter of public record, giving notice to
future purchasers, creditors, or other interested parties.
Recording is controlled by statute and usually requires
the witnessing and notarizing of an instrument to be recorded.
Signing Fee
If you are unable to sign in the escrow office that is handling
your transaction, it may be necessary to hire a Notary
to meet you at an agreed upon location either your home
or another escrow office within your area. The Notary will
charge a signing fee, which covers their travel costs or
time charge.
Courier Fee / Overnight Delivery
Lenders and escrow companies use couriers to deliver documents.
Some lenders will list this fee individually or include
it in the administration fee or processing fee.
Interest
Interest on your mortgage is paid in arrears. Your payment,
usually due on the 1st of the month, pays interest accrued
for the previous 30 days. Your first mortgage payment is
on the 1st of the second month after closing; so, if you
close in the month of January, your first mortgage payment
is March 1st. The March payment includes interest that
has accrued during the month of February.
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Pre-paid Interest
Mortgage loans are usually due on the first of each month.
Since loans can close on any day, a certain amount of interest
must be paid at closing to get the interest paid up to
the first. For example, if you close on the twentieth,
you will pay ten days of pre-paid interest.
The only interest that you prepay is when
you close. At closing, you pay for the interest that will
accrue from the date of your closing to the end of the
month. So, if you close on January 19, you pay for interest
from January 19 to February 1. The worst-case scenario
is that you are charged for 30 days of interest, if you
close at the beginning of the month.
Private Mortgage Insurance
Mortgage insurance that is provided by a private mortgage
insurance company to protect lenders against loss if a
borrower defaults. Most lenders generally require MI for
a loan with a loan-to-value (LTV) percentage in excess
of 80 percent.
Hazard Insurance Premium
You are required to pay your one-year premium for homeowner's
insurance at or before closing (if you choose to pay the
insurance company directly, in which case, you bring proof
of payment to closing). The lender requires that you have
homeowner's insurance to protect the collateral of the
mortgage loan.
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Escrow/Impound Account Descriptions
Homeowner's Insurance Impound
If your down payment is less than 20%, you will be required
to put 2 months' worth of the annual homeowner's insurance
premium into the escrow account, otherwise you will place
1 month into the account. Your monthly mortgage payment
will include 1/12 of the annual premium in the payment,
which is kept in the escrow account until the annual premium
is due. If your down payment is less than 20%, you will
have a two-month "cushion" in the escrow account.
Cushions are allowable but limited under RESPA; in other
words, RESPA accepts the practice of the lender's wanting
to cushion the escrow account but limits the amount of
the cushion to a reasonable amount.
PMI Impound
Private Mortgage Insurance (PMI) protects the lender in the
event that you default on the mortgage loan. It is usually
required if your down payment is less than 20%. You have
to deposit 1 month's worth of PMI premiums into the escrow
account, depending on the lender.
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Property Tax Impound
How much you need to deposit in the escrow account for property
taxes depends on three factors:
- When are property taxes due in the state where the
property is located?
- Are the property taxes paid in arrears or in advance?
- What month are you closing in?
In California, property taxes are paid semi-annually,
with one payment in arrears and one in advance. Your monthly
mortgage payment includes 1/6 of your semi-annual property
tax. Therefore, you will need to deposit the number of
months worth of property taxes into the escrow account
that will yield six months worth of property taxes in the
account at the time that property taxes are due. For example,
let's assume your first mortgage payment is due January
1. The next property tax payment is due in April. You will
make three mortgage payments (January, February, and March)
before property taxes are due. That means that your property
tax payment will be short three months worth of payment.
Therefore, you need to deposit three months worth of property
tax into the escrow account. That way, come April 10th,
the lender can pay the property taxes.
Refinancing Associated Costs
Interest
When you close the transaction on your refinance, there will
most likely be some outstanding interest due on the old
loan. For example, if you close on January tenth (and you
made your last payment on January 1st), you will have ten
days interest due on the old loan and twenty one days prepaid
interest on the new loan (see section above for prepaid
interest). Your first payment on the new loan would not
be until March 1st since you have already paid all of January's
interest when you closed the refinance transaction. Check
with your current lender for the per diem interest charge.
Reconveyance Fee
Your existing lender charges this fee when they "reconvey" their
collateral interest in your property back to you through
recording of a Reconveyance. This fee can vary drastically,
but is typically from $50 to $250. Check with your current
lender for the amount charged.
Demand Fee
Your old lender may charge a fee for calculating payoff figures.
This fee can also vary drastically, but is typically from
$30-$100. Check with your current lender for the amount
charged.
Homeowner’s Association Transfer
Fee
If you are buying a condominium or a home with a Homeowner’s
Association, the association often charges a fee to transfer
all of their ownership documents to you. This fee will vary
depending on the will of the homeowner's association.
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