When you apply for a mortgage, you might be surprised to find out that the lender expects to make money up front. This fee is typically included in the closing costs, and it can be a significant amount of money. But how do lenders make money up front on your mortgage? Here’s what you need to know.
The Application Fee
One way that lenders make money up front is by charging an application fee. This fee is typically a few hundred dollars, and it covers the cost of processing your application and running a credit check. Some lenders may waive this fee, but it’s important to ask about it upfront so you know what to expect.
The Appraisal Fee
Another fee that lenders charge up front is the appraisal fee. This fee covers the cost of having a professional appraiser evaluate the value of the property you’re buying. This is important because the lender needs to know that the property is worth at least as much as they’re lending you. The appraisal fee can vary widely depending on the location and size of the property, but it’s typically a few hundred dollars.
The Origination Fee
The origination fee is another way that lenders make money up front. This fee covers the cost of processing your loan and creating the documents necessary for closing. The origination fee can be a percentage of the loan amount or a flat fee, and it’s typically a few thousand dollars.
The Points
Points are another way that lenders make money up front. Points are essentially prepaid interest on your mortgage, and they’re expressed as a percentage of your loan amount. For example, if you have a $200,000 mortgage and you pay two points, you’ll pay $4,000 up front. The benefit of paying points is that it can lower your interest rate over the life of the loan.
The Title Search and Insurance
The lender will also require a title search to ensure that there are no liens or other issues with the property. This search is typically conducted by a title company, and the cost can vary widely depending on the location and complexity of the search. In addition to the title search, the lender will also require title insurance to protect against any issues that may arise in the future. Both of these costs will be included in your closing costs.
The Prepaid Interest
Finally, the lender will require you to pay prepaid interest at closing. This is the interest that will accrue between the closing date and the end of the month. Depending on when you close, this can be a significant amount of money. The benefit of paying prepaid interest is that it can reduce your monthly mortgage payment.
In Conclusion
Lenders make money up front on your mortgage in a variety of ways, including application fees, appraisal fees, origination fees, points, title search and insurance, and prepaid interest. It’s important to understand these costs upfront so you can budget accordingly and avoid any surprises at closing. If you have any questions about the fees associated with your mortgage, don’t hesitate to ask your lender.