Hidden Financing Costs to Watch Out For

Before applying for a loan or line of credit, you likely research the interest rate. You know to figure this percentage-based fee into the amount you’ll ultimately owe the lender. 

But there are other financing costs you should consider as well. Taking out a loan—especially if it’s to renovate your property so you can earn more off of a sale—is a financial undertaking that should benefit you, not set you back. 

Choose the most wallet-friendly loan by learning to ask about the following hidden fees before signing off. Here’s what to watch out for. 

Origination fees

Loan origination fees are processing costs associated with the review and underwriting process. These fees are generally a percentage of the total loan amount, often from 1 to 5 percent. Not all lenders charge origination fees—for example, Titus does not charge these processing costs to the seller on CLoCs—and some who do may be willing to negotiate. On certain loans, like mortgages, these processing fees can soar, so it’s worth discussing your options with the lender. Imagine taking out a $700,000 mortgage with a 5 percent origination fee; you’d pay $35,000 for this processing cost, which you may want to negotiate down. The pitfall of negotiating a more economical origination fee is that you may be asked to take a higher interest rate in return. 

Variable interest rates 

So, a loan you hope to take out has a decent interest rate. That’s great news. But be sure to confirm that the rate is fixed and not variable. Variable loan rates can jump from one monthly bill to the next, leaving you with surprise costs you might not have enough funds on hand to cover. Home equity lines of credit (HELOCs) and mortgages, for example, can have either variable or fixed options, while personal loans often have fixed rates, as do credit cards. 

Early repayment fees 

Early repayment (also known as prepayment or early termination) fees are penalties for paying off a loan too soon. When a borrower pays faster than expected, the lender loses money on the interest they stood to earn if that person had taken more time to pay. To mitigate this loss, some lenders charge a penalty, which might be a flat fee or a percentage of the total loan amount. Not all loans, lines of credit, or lenders have these fees, so it’s wise to carefully read the fine print to understand an institution’s policy on prepayment penalties regarding the specific type of financing you’re considering. Titus does not charge these fees on CLoCs, for which borrowers make full repayment when they sell their home.

Closing costs

“Closing costs” is an umbrella term for fees associated with the home purchase process. Some of the fees in this guide, like origination ones, fall into this category of real-estate sale costs. But closing costs also include appraisal fees, administrative costs (like deed reporting or credit check fees), and insurance fees. According to Investopedia, closing costs can range from 3 to 6 percent of the total property value for which they’re incurred. So, taking out a mortgage on a $500,000 property could result in between $15,000 and $30,000 in closing costs. 

A savvy tip for home buyers is to try to negotiate the splitting of closing costs. A buyer, for example, could ask a seller to help with some of these fees in return for a perk that benefits the homeowner—like purchasing a home as-is, so that the seller doesn’t have to invest in repairs. A seller might also take the initiative to negotiate closing costs if they believe that it’ll make the sale more attractive to a buyer who’s on the fence.

Annual fees

Certain lenders charge annual fees—a once-yearly, lump sum administrative cost. Annual fees are common on credit cards, and some home equity lenders charge them as well. These fees are generally reasonable—at most, a few hundred dollars—and some lenders boast not having them at all. Be sure to read up on your lender’s policy before proceeding with a loan or new credit card. 

Application fees 

Some lenders charge a loan application fee (regardless of whether you’ll also pay an origination fee). This cost is simply for submitting your information, and paying it is no guarantee of approval. It’s wise to check if lenders you’re considering charge this fee because if they do, and you apply to several, you’ll quickly rack up charges. 

In the same vein, check whether applying for a certain type of loan will show up on your credit report. When you apply for a credit card, for example, this activity appears on the report. Applying for and taking out cards and loans can damage your credit score, which you may be working hard to protect. If considering financing for home renovations or other property sale costs, think twice about any activity that could lower your credit score, since you’ll want it to be as pristine as possible when you apply for a mortgage on your next home.  

Late fees

If you make a monthly payment on a credit card, mortgage, or other type of loan late, the lender may charge a penalty. The same rule often applies if the payment form you used gets rejected, unsuccessfully covering the amount due. Getting hit with a late fee can be frustrating, but it’s a good warning, too. Defaulting on loans can spur more serious consequences, like foreclosure. 

Collateral 

HELOCs and other home equity loans take a borrower’s property as collateral. In one way, this stipulation gives homeowners an advantage. These financing options provide ample funds because lenders calculate the loan or credit amount against the borrower’s home equity (the difference between the amount owed on the property and its current value). But the flip side of getting such a high-limit loan is that the lender leverages the borrower’s home, meaning that should that person default on monthly payments, their home could be foreclosed on (taken away).

While collateral isn’t a hidden fee per se, it’s an important penalty to consider before signing up for a home equity product. If you’re taking out a loan, for example, because you’re struggling financially and wish to supplement your income with lent funds, this can be a risky choice. Ideally, you’d be able to pay all your current bills plus repayment on the loan you’re taking out so that you’re not putting your home on a line.

CLoCs: An excellent low-fee loan option 

Partner with a Titus-affiliated agent on your upcoming home sale and get services from one the best professionals in the real estate industry.

And there’s a major perk: when you team up with a Titus partner agent, you also gain access to an exclusive zero-interest loan for renovations: a closing line of credit (CLoC). CLoCs have low origination fees, and there’s no foreclosure risk since Titus doesn’t take properties as collateral. Learn if a CLoC is right for you here.