Mortgage fees: Mortgage rates, closing costs & pricing explained

No one likes surprise costs or hidden fees. That’s why your lender wants you to know exactly what goes into the price of your home loan so you know what you will have to pay both upfront and on an ongoing basis. This article describes the major costs associated with your home loan that are itemized on your loan estimate.

Mortgage interest rates

Picture this: Mortgage interest rates are like the heartbeat of your loan. They determine how much you’ll pay over the life of your mortgage, so it’s essential to understand them.

The market for mortgage interest rates fluctuates based on a variety of factors, including the economy, inflation, and the lender’s borrowing costs. These rates can be fixed, adjustable, or variable:

• Fixed mortgage rates: These rates remain the same throughout the entire loan term, providing predictability and stability in monthly payments. These may allow for easier budgeting and planning, and home loans with fixed interest rates may be a great option for those who prefer a set monthly expense and don’t want to worry about potential rate fluctuations.
• Adjustable mortgage rates: With adjustable mortgage rates, you start off with an initial fixed rate for a specific period that’s less than the total term of the loan. Typically, this period may be 5, 7, or 10 years, but you may find other options depending on what different lenders offer. After the initial fixed rate period, the rate adjusts according to market conditions, typically on an annual basis. If interest rates go down, your mortgage payment may decrease and give you potential savings. Conversely, if rates go up, your payment may increase, so you may want to be prepared for possible fluctuations with an adjustable-rate mortgage.
• Variable mortgage rates: Variable mortgage rates can change throughout the entire loan term at a frequency determined by your lender. These rates are typically tied to an independent interest rate index such as the prime rate, and may fluctuate accordingly. Similar to adjustable rates, your mortgage payment may increase or decrease based on interest rate changes. Variable rate mortgage loans may be well suited for those who can handle potential payment variations, and for those who are able to keep a close eye on market trends to anticipate rate changes. 

Always remember when it comes to mortgage rates, it may pay to shop around! Comparing offers from different lenders may help you find the best option for your financial future.

Mortgage closing costs

Within three days of taking your loan application, your lender will provide you with a loan estimate that gives you an idea of the total amount you will pay at the time of the closing, as well as an estimate of your mortgage payments and monthly costs.

The mortgage costs can be divided into two categories: the fees that the lender charges and the costs charged by third parties. The total of all these fees and costs is what you will be asked to pay at the time of the loan closing, so understanding mortgage rates and pricing will help you in the long run.

Mortgage fees set by the lender

When comparing various home loan offers, you want to focus on the costs that are controlled by the lender.

Every lender has different loan programs and pricing, so it’s important to look at all the costs – not just the quoted interest rate. This may help you to determine which offer is best for you.

Here are some of the items where costs may be determined by the lender:

• Interest rate: The interest rate is the cost of borrowing money and is used to calculate your monthly mortgage payment. The higher the interest rate, the higher your monthly payment will be, and vice versa.
• Discount points: This is an up-front fee that you can choose to pay if you want to reduce the interest rate on your loan. Buying discount points makes sense if you plan to stay in your home a long time, as the money you save on interest payments over the life of your loan will be greater than the one-time fee you pay.
• Origination charge: This is a fee for processing a mortgage application, pulling credit reports, verifying financial information, and creating a loan.
• Rate-lock fee: If you choose to lock in your interest rate beyond a certain period, you may be required to pay a fee at the time of closing.
• Other fees: Other fees controlled by the lender include a document preparation fee, processing fee, application fee and underwriting fee.

Mortgage costs set by third parties

Some other costs involved with taking out a home loan are outside your lender’s control. These costs may be established by your state or local government or set by the individual vendors that provide the service. This category also includes prepayments for taxes and insurance.

Here is an explanation of these potential costs:

• Service charges: Several service providers may be required to complete the purchase of your home, including an appraiser to estimate the value of the home you are buying and an inspector to check the condition of the house. For some services, your lender may pick the vendor, and for other services, you may select your own vendor.
• Title services: Title services typically consist of two costs:
  • One cost is charged by the title agent for determining the rightful ownership of the home you are buying and handling the paperwork for the transaction.
  • A second cost is charged by a title insurer to protect your lender if it is discovered that there are unpaid liens on your home (this second cost may or may not be required by your lender).
  • Some states require attorneys to be involved in all real estate transactions, and if this is the case in your state, an attorney’s fee may also be included in the title services charges.
• Government recording charges: These charges are for the state and local agencies to record the loans and title documents.
• Transfer taxes: Depending on where you live, your state, county or city may charge a tax when the ownership of a home is transferred.
• Escrow deposit: At the closing of your home loan, if you are required to have an escrow account or if you decide to have one, there may be an initial deposit in that account to pay for future recurring charges on your home, including property taxes and insurance. You will also typically need to pay for the first year of your homeowner’s insurance in full before your home loan closes.
• Daily interest charges: This charge covers the amount of interest that you will owe on your home loan from the time your loan closes to the first day of your regular mortgage billing cycle.
• Flood insurance: This is a form of hazard insurance that is required by lenders to cover properties in flood zones.

Mortgages and annual percentage rates (APRs)

There is one other item to know about – the annual percentage rate (APR). This rate will include the costs of both lender and third-party fees. The APR reflects the combined cost of the interest rate, the origination charge, discount points and other upfront costs typically including lender fees, processing costs, document fees, prepaid mortgage interest and mortgage interest premiums.

Lenders will calculate the APR by adding up the annual interest paid, lender fees, third-party fees, and any prepaid interest or mortgage insurance. Then, they’ll provide a number to you that you can use to compare with other offers. While all costs are important to consider, your APR is the best way to compare costs of loans across lenders because it most accurately reflects the total cost of the loan.