Understand the Key Loan Costs and Terms
Credit Report
Checking your credit score usually costs less than $50. When you apply for a loan, with your permission, the lender will request a detailed credit report from one of the major credit bureaus. This report includes your outstanding debts, payment history, and overall credit behavior, helping the lender assess your creditworthiness.
Application and Processing Fees
Most lenders charge an application or processing fee to cover the administrative work involved in reviewing your financial information and qualifying you for the loan. This fee typically ranges from a few hundred dollars and sometimes can be credited back to you at closing, so it’s worth asking your lender.
What is APR (Annual Percentage Rate)?
The APR represents the true cost of borrowing expressed as an annualized percentage. It includes not just the interest rate but also certain fees and other loan-related costs. For example, a loan advertised with a 5.875% interest rate might have an APR of about 6% once fees are included. This means for every $100,000 borrowed, you would pay approximately $6,000 per year in interest, with principal payments spread out over the loan term (such as 15, 20, or 30 years).
Interest Rate Indexes
For adjustable-rate loans, the interest rate fluctuates based on changes in an underlying benchmark or “index.” Common indexes include the Federal Funds Rate or Treasury Bill rates. When the index moves up or down, your loan’s interest rate adjusts accordingly, impacting your monthly payments.
Points (Discount Points)
Points are upfront fees you can pay to reduce your loan’s interest rate. One point equals 1% of the loan amount. For instance, paying 1 point on a $200,000 loan means paying $2,000 upfront. Points are often used to “buy down” the interest rate, potentially saving you money over the life of the loan. These costs may be tax-deductible—check with your tax professional for guidance.
Appraisal Fee
Lenders require an independent appraisal of the property to verify its market value, condition, and size. This helps confirm that the purchase price is fair and protects the lender by ensuring the property can cover the loan amount if foreclosure becomes necessary. Appraisal fees vary depending on the property type, location, and complexity, typically ranging from a few hundred to over a thousand dollars.
Other Closing Costs and Fees
During loan processing, you may encounter additional fees such as notary services, courier charges, title searches, and county recording fees. These miscellaneous costs can add up, so it’s important to review the Loan Estimate your lender provides early in the process.
Prepayment Penalties
Some loans include penalties if you pay off your loan early—whether by refinancing or selling the property—within a certain time frame. These penalties vary by lender and loan product, so ask upfront if your loan has any prepayment fees and how long they apply.