Know the Numbers

by Alex Mendel

Understanding the costs and processes involved in securing a loan is crucial for any homebuyer. Here’s a breakdown to help you navigate the financial aspects of buying a home.

Credit Report

Checking your credit typically costs under $50. With your permission, the lender will order a review of your outstanding loans and repayment history from a third-party credit agency. This helps determine your creditworthiness and loan eligibility.

Application / Processing Fee

Lenders charge an application or processing fee, usually a few hundred dollars, to evaluate your ability to repay the loan. Some lenders may credit this fee back to you upon closing.

What is APR?

The APR, or annual percentage rate, represents the total cost of borrowing, expressed as an interest rate on the loan balance. For example, an initial interest rate quote of 5.875% might translate to a 6% APR after fees. This means you'll pay approximately $6,000 per year in interest for every $100,000 borrowed, with principal payments calculated based on the loan term (e.g., 15, 20, or 30 years).

Indexes

Variable loan interest rates adjust periodically based on changes in an index, such as the Federal Funds Rate or Treasury Bill.

Points

Mortgage companies may offer lower interest rates but charge points—a one-time prepaid interest payment—as a percentage of the loan. Points typically range from 0.25% to 2% of the loan balance and are paid upfront. Points are tax-deductible, so consult your tax advisor for details.

Appraisal Cost

Lenders hire independent appraisers to evaluate the property's purchase price, condition, and size compared to similar recent sales in the neighborhood. This ensures the purchase price is reasonable and gives the lender confidence in repayment if they need to sell the property due to borrower default. Appraisal costs vary based on the property, type of appraisal, and region.

Miscellaneous Fees

Loan processing involves various charges, including notary, courier, and county recording fees. Expect to see these miscellaneous fees in your loan documentation.

Prepayment Penalties

Prepayment penalties vary widely. Know in advance if your lender will charge a penalty for refinancing or selling the property and the period during which these penalties apply.