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How to Calculate Your Upfront Mortgage Costs

A mortgage will cost you a lot of money.  If you’re like most of us, you’ll be spending thousands of dollars a month paying it off for a few decades.  But mortgages don't just take time to pay off.  They cost money up front, too.  You have to lay down some cash for the privilege of borrowing the funds you need.  This is true whether you're seeking a home purchase loan or a refinance.

Many borrowers try to find the lowest mortgage rates and determine what monthly payment amount they can afford based on the principle they need to borrow.  This is good.  But closing costs, lender fees, points, and other cash payment requirements sometimes catch borrowers off guard.

Upfront Fees You’ll Pay on Your Mortgage

The exact costs you’ll need to pay will vary depending on your financial needs and goals and the specific circumstances of your loan, but this comprehensive list will get you started.

Down payment.  This varies widely depending on the home you’re purchasing, the type of mortgage you’re taking out, and how much money you have.  It’s often best to make the largest down payment you can, but don’t forget to save money for the other expenses on this list.

Discount points.  These are like miniature down payments.  A point is equal to 1% of the total loan amount.  Most lenders allow borrowers to pay points upfront at closing to buy down the interest rate on the loan.

Origination points.  This charge is sometimes referred to as an origination fee.  You pay this to the lender for the service of preparing the loan.

Application fee.  Self explanatory.  You pay this when you file the application, not at closing, and it’s typically a negligible amount.  But if you’re applying to multiple lenders, it can add up.

Credit check fee.  Another fee paid during the application process.

Appraisal fee.  The cost of this fee depends on the value of the home.  The appraisal validates the market value of the home you’re purchasing.

Loan processing fee.  Often rolled into the origination fee but sometimes calculated separately.

Underwriting fee.  This charge is levied by the underwriting company and is also sometimes rolled into the origination fee.

Title search.  A title search is a thorough examination of the property’s history, and it’s one of the most important steps in the home purchase process.  The search ensures that you’re purchasing the property from the rightful owner and that there are no outstanding liens attached to the home or land.

Title insurance.  Sometimes title searches don’t turn up all the details.  Title insurance guarantees you that you’ll be protected in the years to come in case any lawsuits or liens are called up on your new home.

Survey fee.  The title company you work with may require a survey of the property.  You’ll have to pay for this.

Flood certification.  Flood certification ensures that the home is not located in a flood zone.

Prepaid interest.  If your loan closes in the middle of the month, you likely won’t make your first true mortgage payment until sometime during the following month.  You lender will charge you interest on the elapsed time between the loan closure and your first payment and may require you to pay this amount upfront.

Prepaid insurance.  Your lender may require you to prepay mortgage insurance or homeowners’ insurance.

Document preparation fee.  This fee pays an attorney to review all documents and contracts involved in the mortgage.

Escrow fees.  Your lender will require you to make most of these payments through an escrow account.  These accounts are not free.  They carry a minimal charge.

This gives you an idea of the complexity involved in closing a home purchase.  Each of these costs varies widely from place to place and from situation to situation, and depending on where you live and the home you’re buying, you may not have to pay some of them.  The average total for all closing costs, down payment and points excluded, falls between $3,000 and $10,000.

How to Calculate Your Upfront Costs

There’s no way to know for sure what you’ll have to pay upfront on your mortgage until you take the plunge.  It’s impossible to calculate all the costs associated with a home if you don’t know what home you’re planning to buy or what lender you’ll be working with.

Despite this, lenders are required to provide you with what’s called a Good Faith Estimate (GFE) long before you get to the closing table.  This is required under the Real Estate Settlement Procedures Act (RESPA).  The good faith estimate is a standardized form used by all lenders.  It is intended to help borrowers compare mortgage costs between lenders.

Government regulations have long tried to prevent lenders from scamming borrowers.  The GFE was designed to regulate the costs tied to taking out a loan.  New regulations were passed at the beginning of January 2010 that require lenders to pay for any significant changes that occur between the issuance of the GFE and the closing or settlement of the loan.

The US Department of Housing and Urban Development (HUD) provides a blank sample GFE you can view to get an idea of what the form covers, and The Consumer Financial Protection Bureau is planning to create and implement a new short formthat all lenders will be required to use in order to help borrowers compare lenders effectively.

Your lender is required to provide you with a GFE within three days of your application.  Once you’ve received this document, take the following steps to calculate your upfront mortgage payments.

1.  Analyze each expense listed.  Make sure you know what you’re going to need to pay.

2.  If you don’t recognize a given expense, ask your lender what it means.  Don’t assume that all expenses are standardized.  They’re not.  The form is standardized, but many lenders charge different rates than other lenders.

3.  Negotiate with your lender.  You can often negotiate some costs down before you reach the closing table.  If you don’t try, you’ll never know how much money you could have saved.  Try to talk your lender down on any fees you can.  You likely won’t have much luck with the smaller, negligible fees, but some of the larger expenses, such as the origination fee, can often be negotiated.

Once you’ve completed these steps, you should be able to calculate the upfront cost of your mortgage with enough accuracy to make financial decisions.

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