Costs of Securing a Loan

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There are a number of costs associated with securing a real estate loan. Those described herein do not exhaust all the possibilities, and they are not all included in each loan transaction.

Placement or Origination Fee. Most lenders charge the borrower a placement or origination fee of from one to three percent of the loan amount to cover the costs of establishing a new loan. This charge pays for the services of the loan officer and others, as well as for the materials used in the loan process.

Discount Fee (Points). Invariably, a discount fee is charged in a realty loan transaction. This fee is designed to offset some risk to the lender, such as a borrower whose credit is borderline or some other high-risk circumstance. In addition, discounts are often charged by lenders to raise the effective yield on the loan. The costs incurred by the borrower are a reflection of the effects of the supply and demand for money. These discount fees virtually disappear in an easy money market, but they can be very high in a tight money market. Discount fees described as points are based on a percentage of the face amount of the loan. One point is equal to one percent of the loan amount. Thus a two point fee on a $50,000 loan equals $1,000.

Impound Requirements. When a loan requires the impounding of property taxes and hazard insurance premiums, a borrower will be required to deposit a sum into a new loan escrow to prime these impounds so that adequate funds will be available to make the payments when required. The amount of the specific charges will vary with the time of the year that the loan was closed. However, once the impound account is primed, a monthly amount for taxes and insurance will be added to the monthly principal and interest payment. These funds are placed in a trust account,, and the financial institution is responsible for paying the property taxes when they are due.

For instance, if property taxes are $1,200 per year and the insurance premium is $180 annually, both being due in the first of November, and the loan is to close on the first day of March , with the first payment not due until April 1, then four months’ taxes ($1,200/12 = $100 x 4 = $400) and insurance ($180/12 = $15 x 4 = $60) will be charged to the borrower to cover the months from November through March. This $460 amount will be deposited into the impound or escrow account to which $115 will be added monthly from the regular payments beginning February 1 in order to have the required amounts available to pay these charges on the following November. Thus, in addition to any placement and discount fees, a borrower must be prepared to pay the impound requirements.

Interest Adjustments. Most lenders arrange their loan payments for collection on the first or 15th day of the month, based to some degree upon a borrower’s requirements. Payments are made in arrears; that is, the payment on April 1 covers the interest on the loan for the month of March. Customarily, these payments start a month or two after a loan’s inception, depending upon the month a loan is closed. As a result of varying closing dates and specific starting times, interest is usually adjusted from the closing
date and is charged to the borrower to establish the appropriate payment pattern.

For example, if a new loan is closed on the 15th day of a month, and the first payment is not due until 45 days later, a 15 day adjustment of interest would be charged to the borrower and collected at the loan closing. In terms of dollars, this can be illustrated with a $100,000 loan at 6 percent interest per annum that is closed on September 15th, with the first payment not due until November 1. The interest adjustment to be charged to the borrower on the loan closing statements is $246.58. This is the interest due from September 15 to September 30th ($100,000 x .06 =$6,000 annual interest; $6,000/365 days = $16.44 daily interest; $16.44 x 15 days = $246.58). The first payment due on November 1 will include the interest required for the month of October, and each subsequent payment will include an amount for interest on the principal balance outstanding in the previous month. This payment pattern, known as amortization,
continues until the loan is paid in full. Financial institutions are required by law to quote the borrower’s true interest charges, also known as annual percentage rate(APR), which includes loan placement fees as well as points and certain other costs. 

Prepayment Penalties. Whenever an existing financial encumbrance that includes a prepayment penalty agreement is satisfied prior to its normal time, the amount of the penalty is charged to the owner of the collateral property. Thus, if an existing loan is repaid with funds recovered from a buyer who has a new loan, the seller will be charged the penalty. In situations where an existing loan is replaced by property owners who secure refinancing, the owner will be charged accordingly.

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Title Insurance Premiums. As discussed earlier, most lenders will require that title insurance be issued. When a new loan is a concurrent part of a property sale, two title insurance policies are required. The first, for the full amount of the purchase price, is called an owner’s title insurance policy and will be issued in the name of the new owner. The seller usually pays the premium for this title policy unless the terms of the transaction state otherwise.

The second title insurance policy, called mortgagee’s title insurance policy, is issued in favor of the lender. The premium for this policy is paid by the borrower and usually at a greatly reduced rate because when a loan is being secured as part of a property’s purchase, this policy is issued simultaneously with an owner’s policy, and the coverage is only for the duration and amount of the loan. All title insurance premiums are paid only once and guarantee the named beneficiaries as long as they own the property or as long as a loan is in existence. Once a property is resold or a loan is repaid, new policies are sold to serve the new circumstance. Title insurance companies operate under the jurisdiction of the insurance commissioner of California

Mortgage Insurance Premiums (MIPs). When an FHA, VA or private mortgage insurance plan is part of a loan agreement, a premium may be charged to the borrower for the coverage required. The FHA charges an insurance fee that may be added to the loan amount or paid in cash at closing. Private mortgage insurance companies sometimes require a one-time insurance premium or a monthly premium for prescribed number of years.

Life Insurance Premiums. Occasionally a borrower will purchase a life insurance policy when securing a real estate loan, naming the lender as beneficiary, so that the balance of the loan will be paid in full in the event of the borrower’s death. Known as a decreasing term policy, this will put the property, usually a home, into a free and clear position. Charges for this life insurance coverage, which usually have level annual premiums, normally will be included in the regular monthly payments. Such a life insurance policy is totally optional.

Additional Charges. Any costs of securing a credit report, appraisal, survey, attorney’s title opinion and other services expended on behalf of the borrower will be charged accordingly. Under certain circumstances, the seller and buyer-borrower share costs such as escrow fees, title policies and recording charges. Participants in a loan transaction are responsible for paying their own attorney’s fees, and the seller usually pays the real estate broker’s fee. 

Other Requirements. Often new homes or remodeled houses in urban renewal areas will need documents indicating that they have met the housing code and are ready for occupancy. Also, in those parts of the state exposed to possible flooding from lakes or rivers, the Army Corps of Engineers has designated certain lands as flood areas. In order to secure financing for houses in these floodplains, borrowers must purchase flood insurance. 

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