Loan Costs

Here is a breakdown of loan costs:

Processing fee - This is the fee the lender charges to cover initial costs for processing the loan. This includes the application fee and fees for accessing your credit report. These fees 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 it has to do when preparing your mortgage. The fee 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 are buying "down" the interest rate you will be paying. One discount point is equal to 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 fee 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.

Attorney fees - Both you and your lender will have attorney fees that you will typically have to pay. This fee covers costs for the attorney to draw up the documents and assure that everything is set up as it should be. Your own closing attorney will represent your interests and may be present at, or may facilitate, the closing itself. The closing attorney collects all fees, transfers the deed to the buyer, pays outstanding taxes and utility bills, pays himself and all other closing fees, and gives all remaining money to the seller. The attorney fees may range from $500 to $1,000 or more, depending on the purchase price of the property and the complexity of the sale.

Home and pest inspections - Your lender will probably require that the home be inspected to make sure it is both structurally sound and not being invaded by termites or other destroying insects. You may also have to have the water tested if the property has a well rather than city water. In some areas, the water test means checking only the quantity of water available to the house, rather than the quality. If this is the case, you may want to have your own water quality test done.

Homeowner's and hazard insurance - You will have to have these policies in place (and the first year's premium prepaid) at the time of the closing -- at least in most states. This insurance protects your (and the lender's) investment if the house is destroyed.

Private mortgage insurance (PMI) - If your down payment is less than 20 percent of the value of the house, you may be required to purchase mortgage insurance. This protects the lender in case you fail to make your mortgage payments. Premiums will usually be a part of your monthly mortgage payment and will be transferred into the same escrow account your taxes and homeowner's insurance fees are paid into. You have to pay these PMI premiums until you reach the 20 or 25 percent requirement -- or, they can go on for the life of the loan. (See the next section for more details on PMI.)

Surveys- Many lenders will require that the land be surveyed by an independent surveying company. This is just to ensure that there haven't been any changes, like new structures or encroachments on the property, since the last survey. These usually run $250 to $500.

Prepaid interest - Although your first payment won't be due for six to eight weeks, the interest will begin to accrue the day of the closing. The lender calculates the interest due for that fraction of a month prior to your first official mortgage payment. This means you will probably have to pay that interest upfront as part of the closing costs. For this reason, it is a good strategy to plan your closing for the end of the month to reduce the amount of interest you have pay upfront.