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How Mortgages Work


List of Closing Costs, Part I

Here are some of the major fees included closing costs:

  • Processing fee --This is what the lender charges to cover initial loan processing costs. It includes the application and credit report access fees. These charges are usually around $400 to $550. Something to watch for when comparing lenders: Sometimes the credit report fee will be listed separately from the processing fee.
  • Appraisal fee -- Because the lender wants to make sure the property is worth what you are paying for it, it requires an appraisal. An appraisal compares the value of the property to similar properties in the same neighborhood. These services are performed by independent appraisers and usually cost around $250 or more depending on the price of the property.
  • Origination fee -- In addition to the application or processing fee, the lender may also charge an origination fee. This covers the additional work the lender has to do when preparing your mortgage. The charge may be a flat fee or a percentage of the mortgage. If the fee is a percentage of the loan, then it is typically considered a "discount point" in disguise. This changes the tax implications and your costs, so be sure to ask the lender about this fee.
  • Discount points -- Buying discount points means that you're buying "down" the interest rate you'll be paying. One discount point equals 1 percent of the loan amount. These points are paid either when the loan is approved or at closing. Buying points can save a lot of money in interest payments over the life of the loan, so investigate it when you're shopping around. Some lenders will let you add the cost of the points to your mortgage, or you may have the option of paying for them up front. You can also deduct those points from your federal income tax. For more information about what is tax deductible, click here.
  • Document preparation fee -- This charge may be included in the application or attorney's fee. It pays for the preparation of the mound of documents that have to be prepared and is usually a flat rate, but can also be charged as a percentage of the loan amount -- usually less than 1 percent.

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