Home Equity Loan Fees and Closing Costs

Home loan closing costs can be significant

As we previously discussed in part one of this article on closing costs, the amount of money a home buyer has to pay at the time of signing loan documents is substantial. It ranges from large fees for originating the loan to small fees for copying paperwork and running documents across town. Here we will outline additional charges that a prospective buyer should expect to pay (and bring with them in the form of a cashier’s check) at the time of closing on a home equity loan or mortgage.

Pest inspection fee - Not always required, especially for new properties, but this is a fee charged to hire an exterminator to examine the property for infestation of termites and other potentially harmful pests that could cause structural damage to the property. This could cost $100 or so.

Property inspection fee - The fee to examine the property for structural damage, plumbing issues, electrical problems, roof problems and basement or foundation problems. Total costs for these could run $500-700, although these fees would probably be charged only for existing property.

City transfer tax - A fee charged by some municipalities to transfer the name of the new owner to the tax rolls for the city. This fee is usually several tenths of one percent of the selling price.

Miscellaneous fees - Copying fees, notary fees, postage fees, courier fees and other miscellaneous office expenses.

Prepaid interest - Interest on the loan amount from the close of escrow to 30 days prior to the first payment on the mortgage.

Private mortgage insurance - Required on all loans which represent more than 80% of the value of the property. This protects the lender should the buyer default on the loan. About one year’s worth is required at closing. This fee could run to as much as 1% of the loan amount.

Escrow fee - A fee paid to establish the escrow account from which property taxes will be paid. 

As we have previously mentioned, these fees add up to quite a large sum and the buyer should expect to have quite a bit of cash on hand at closing. It would be a good idea to try to get some sort of estimate from the lender ahead of time. The last thing you want when buying a house is a call from the lender at 4:45 PM the day before closing saying, “We will need a cashier’s check for $15,000 from you at closing. See you at 8 o’clock tomorrow morning.” That might make it rather difficult to come up with the check on time.

A number of lenders are now offering loans advertised as being ”no fee mortgages.” This is a bit of a misrepresentation; there will always be costs associated with preparing a loan. The difference is that the fees normally associated with closing costs will be rolled into the loan. The buyer will not have to present a fat check at the time the loan is signed, as the amounts will simply be added to the loan balance. On the downside, the buyer will then have to pay interest on those costs for the life of the loan. It’s cheaper to pay them up front.

Another alternative to adding the costs to the loan amount is to simply charge a slightly higher interest rate on the amount borrowed. As above, this simply means that instead of paying up front, you will pay for the duration of the contract, which could run as long as 40 years.