The Cost of a Mortgage Loan

The first fee associated with the mortgage loan in the appraisal.  An appraisal is used to find out how much your property is worth. A certified appraisal can also help with other matters, including taxes and eliminating private mortgage insurance. Also, a licensed appraiser can help you with estate planning, analyzing the feasibility of proposed improvements, determining the best use for a property, and with insurance valuations.

A credit report is also a part of the mortgage loan.  Home buyers who are seeking a mortgage find out early-on that their credit score plays an important part in the home buying process and in determining the interest rate that a lender offers.  The credit report is a detailed report of your credit, employment and residence history that is prepared by a credit bureau.  A credit score is a number that lenders use to estimate risk. Experience has shown them that borrowers with higher credit scores are less likely to default on a loan. 

The principal is the part of the loan that shows the amount owed on a mortgage, which doesn't include interest or other fees.  Another part of the mortgage loan are the document fees, loan fees and processing fees that are miscellaneous fees charged by the lender.

Discount points are fees paid to a lender at closing in order to lower your mortgage interest rate. While buying points is sometimes a good decision, many times the purchase costs you more than it saves.  The cost of each point is equal to one percent of the loan amount. For instance, for a $100,000 loan one discount point equals $1,000.  Each discount point paid on a 30-year loan typically lowers the interest rate by 0.125 percent.  Paying for points lowers your interest rate, because the lender receives the income in a lump sum at closing rather than collecting the interest as you make payments on your loan.  Origination points are the total number of points paid by the borrower at closing.

Interest rates are also included in the mortgage loan.  This is a percentage of a loan or mortgage value that is paid to the lender as compensation for loaning funds.  Interest rates react to the fundamental factors of supply and demand as well as economic forces in several areas, among them: The Federal Reserve Board's monetary policy, legislative and executive fiscal policies, business activity and inflationary expectations. Generally interest rates will be low in a sluggish economy because the demand for credit is low. On the other hand, interest rates will rise in a strong economy because demand for credit will be high.

The Annual Percentage Rate (APR) is the interest rate, which reflects the actual cost of a mortgage as a yearly rate. This rate is usually higher than the stated loan rate for the mortgage, because it takes into account points and other closing cost charges.  Not all lenders calculate a loan's APR in the same way.  For this reason, it shouldn't be the only resource used in selecting the best mortgage for you.