Definition
A finance charge is a fee you pay to a lender for the cost of borrowing money. It can be a flat fee or a percentage of the loan amount, and it’s meant to offset the lender's risk.
Understanding Finance Charges in Mortgages
Finance charges appear when you review your mortgage documents, often at closing. These charges include interest and other costs related to borrowing. In simple terms, they are the total cost of credit to the borrower. Example: If you borrow $100,000 and pay $5,000 in interest and fees over the loan term, that $5,000 is your finance charge. It’s not just about the interest rate; it includes all costs associated with the loan. A common misconception is that finance charges cover only interest, but they also include fees like origination and service charges.
