What Fees Should You Expect When Financing a Rental?
Interest rates remain low, making this a great time to finance an investment property. However, it is important to be prepared for the extra fees you will face when taking a mortgage for a rental home. These fees must be paid along with your down payment at the time of closing, if not before, and planning ahead will help prevent any bumps in the road.
Fees Charged by Your Lender and Service Providers
Many of the fees you will pay to finance your rental property are paid directly to the lender. The figures below are approximate. For detailed information on specific costs charged by your mortgage company, check your Truth in Lending disclosure.
- Processing Fee: Your lender receives this amount, which is intended to cover costs associated with processing your mortgage application. These fees do not usually exceed $1,000.
- Underwriting Fee: This charge is assessed by your lender to cover costs associated with decisioning your loan application. Underwriting fees are often as high as $795.
- Miscellaneous Fees: Your lender is likely to charge you for any fees incurred in processing your application -- for example: courier fees, postage fees, and credit report fees. All of these fees are fairly small, but they can add up to several hundred dollars.
- Appraisal Fee: Though the cost of getting an appraisal is paid to the appraisal company, it is typically paid to the lender, who then hires the appraiser.
- Loan Discount Points: If you wish to bring your insurance rate down, lenders may offer you the option of prepaying interest in the form of loan discount points. At closing, you pay one percent of the total loan amount, which will reduce your payments going forward.
- Flood Determination: Lenders want to know whether your property is at risk for flood damage, so an assessment of whether the area is in a flood zone is required. Fortunately, the charge for this service is fairly low.
- Title Fee: You want to be sure that no one but the seller has claim to the property you want to buy. Your title company will conduct a thorough search on the deed to ensure you don’t run into future issues. Costs for this service vary widely.
- Survey Fee: Some states require a survey company to ensure that property lines are accurately recorded. Costs for this service vary, but they do not usually exceed $450.
- Closing and Escrow Fees: The individuals who conduct your closing (for example, the title company or real estate attorney) charge a fee for their service. The costs are typically calculated at two dollars for every thousand dollars of the home's purchase price, plus an additional amount of approximately $250.
- Recording Fee: This is a charge assessed by the city or county recording office responsible for documenting real estate records.
- Buyer’s and Lender’s Attorney Fees: When buyer’s and lender’s attorney fees are required, they can add a significant amount to the bottom line payment due at closing.
- General Inspection and Pest Inspection: Whether or not your lender requires a general inspection or an inspection for wood-destroying pests, the cost is well worth the peace of mind of knowing you won’t face thousands in repair costs down the road.
The upfront costs of financing a rental property can rapidly climb into the thousands. Preparing for these fees ahead of time will prevent unpleasant surprises when you finally get to closing.
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