No Cost Loans: What Fees Don’t Get Paid?

Casey Fleming
"No cost" loans do not exist.
The Unicorn Loan?

It costs money to buy a home. Sure, this doesn’t surprise you. But you’ve seen ads for no cost loans, right?  You will pay these costs one way or another.  So let’s look at the costs.

An eye-opening fact is that you will spend more money on your home than you will on anything else you buy in your lifetime. Still not surprising, but a little sobering? How about this? You will probably spend more money on your mortgage than you will on your home. Even more sobering: You will likely spend more of your working hours to pay for your home than everything else you work for, combined.

So what are these fees, and how can you control them?

It is easiest to think of the fees as being in two large boxes. One box contains all the costs of getting the loan, and the other contains all the costs of having the loan. Put another way, one is the cost of paying everyone who works on your loan for their services, and the other is paying for renting the investor’s money for the next 30 years.

The box that you have the most control over is the cost of having the loan, which we used to call points, and now commonly call the price you pay for the interest rate you choose. That is the most complex to understand, so we’ll set that aside for a moment and open the other box.

The second box – the cost of getting the loan – contains several smaller boxes, marked lender, escrow, title, government and inspection fees.

Fees are endless
this is what most folks see when they close their loan.

The first smaller box from box two contains lender fees. Lender fee are those charged by the lender to process, underwrite and fund your loan. Think of these fees as being separate from your interest rate; each one pays for the labor to complete a necessary task. They include processing and underwriting for sure, although the processing and underwriting fees might be called “administrative,” “application” or “commitment” fees or something else. These fees vary widely from one lender to another, but those that don’t charge it might simply charge you more in the big box that we’ve set aside. In some areas of the country you may also be asked to pay for a survey, too.

The next smaller box contains escrow fees. Escrow fees pay for an independent third party to collect all of the important documents, agreements, instructions and money, and execute the transaction as a neutral party. Escrow fees might include an escrow fee, notary fee, courier fee, and in some cases minor fees for administrative costs, such as printing loan packages.

The third smaller box is title fees. Title fees pay for a title search, owner’s title insurance, and if there is financing lender’s title insurance.

A title search researches the chain of title on the property so that you are buying exactly what you think you’re buying; specifically, the research shows the exact legal description which defines the property, and uncovers any limitations to your right to the property, such as easements, encroachments, or other claims on title.

Owner’s title insurance is literally an insurance policy that insures against any issues that the title search did not cover. For example, if a previous owner claims that they had a right to the property and were not compensated for it, the insurance policy pays to defend against that claim, and pays it if the claim is valid.

Lender’s title insurance is a policy that insures that they are properly secured in the event they have to foreclose to get their money back.

The fourth smaller box is government fees. In all transactions the county recorder will charge a fee to record the appropriate deeds in the transaction. In a purchase transaction, for instance, the seller executes a grant deed granting the title to the property to the buyer. When recorded, it is now a matter of public record that you own the property, and only you now have the right to sell it.

But the government also typically charges taxes, especially on purchase transactions. In most counties in California the county levies a tax of $1.10 per $1,000 of purchase price, plus a city might levy more on top of that. This can add up to quite a bit of money in many cases.

While you may have the right to shop for some of these services, in most cases they are selected for you by your real estate agent or lender, unless you insist otherwise. In areas where the seller pays for half or all of these fees, you as a buyer would have no say at all.

Then there is the appraisal fee. The appraiser used to be paid through the lender, but that isn’t the case anymore. You pay the appraiser directly, typically by credit card, in advance, when the appraisal is ordered by the lender. It is handled this way because the appraiser must be completely independent. He or she must be chosen by an independent third party (called an appraisal management company), and the appraisal fee cannot be contingent on the outcome. The appraiser is paid whether your loan closes or not.

The Home Inspection
Everyone who works on your loan gets paid

Finally, you may have inspection fees.  These could include a survey, pest inspection, property inspection, and several others depending on circumstances.  In almost all cases you may select the provider for these services, and thus may control your costs that way.

The point is that the fees other than lender fees are not generally negotiable in the real world. In theory some of them are, but in practice most of them are not.

What you do have a choice about is how to pay for these fees. In most cases you can either pay for them in cash, or finance them either through a larger loan amount or through a higher interest rate. The important point is that you will pay for these costs, one way or another.

To find out how exercising your options for paying for these costs works, please click here to read the next blog.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
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