Is a No-Fee Mortgage Suddenly Ok? Ask the Experts!

Is a No Fee Mortgage Suddenly Ok- 150x150One of the reasons that may be keeping you from becoming a home owner is the large closing cost that comes with taking out a mortgage loan. Between all the fees that you have to pay when closing on a mortgage loan, you will end up paying several thousand before you even start making monthly mortgage payments. Add the required down payment to that, and you have a reason not to take out a mortgage loan.

Lately, many lenders have been pushing a no-fee mortgage loan, which may be the answer for someone who can’t afford to pay for the closing costs all at once. But, as with all the types of loans that are designed to help people who can’t take out a conventional loan, there are aspects of the no-fee mortgage which, depending on your situation, can make the overall cost of your loan much higher.

What is a No-Fee Mortgage?

Like its name implies, the no-fee mortgage is a type of mortgage loan that doesn’t require the borrower to pay any closing costs or fees. Fees for appraisals, processing, applications and many others are all waived, at the cost of paying a higher interest rate. Depending on each borrower’s situation, this might be the perfect solution, or something that will come back to haunt them later.

Closing costs can total over $5,000, so having these costs waived sounds really good for a borrower who also has to make a hefty 20 percent down payment when taking out a mortgage. This type of mortgage has its pros, but it also has serious cons. The decision of whether to apply for this loan should be based on each borrower’s individual budget and financial situation, not on the fact that you get to save several thousands in the beginning.

Pros and Cons of the No-Fee Mortgage

One of the pros of choosing this type of mortgage is that you will be protected against being overcharged on fees and closing costs. Usually, when a borrower shops for a mortgage loan, he or she only looks at the interest rates when comparing loans. Then, when the closing time comes, they are taken by surprise by all the fees that have to be paid. Lenders usually add several junk fees to the closing costs, driving the cost a lot higher than the borrower would expect. Because a no-fee mortgage requires the borrower to pay a higher interest rate and no closing costs, the borrower can easily compare loans from different lenders by just looking at the interest rate.

Another advantage of no-fee mortgages is that, even though the interest rate is larger, the rate that you are paying is tax deductible.

The largest disadvantage of a no-fee mortgage is that that borrower will have to pay a higher interest rate than he or she normally would, if they paid the closing costs. The higher interest rate is calculated by estimating the closing costs and finding the right interest rate that will cover them. The high interest rate can become burdensome over time, so it’s important to consider all aspects before taking out a no-fee mortgage loan.

Alternatives to the No-Fee Mortgage

The easiest alternative to the no-fee mortgage is to pay for the closing costs when the time comes. This is the best and probably cheapest choice, but it requires you to come up with a fairly large amount of money on top of the already expensive down payment.

Adding the costs to your loan amount is another alternative to the no-fee mortgage. With this option, your lender will roll your closing costs and loan amount together, and you will have to pay the entire amount, with interest, over time. The advantage is that you won’t have to pay all those fees at closing, but the disadvantage is that this means you will take on more debt.

No-fee mortgages are a good choice for borrowers who can’t pay the closing costs upfront. By waving those fees, more people can afford to become home owners, but it is very important to understand that the fees will still be paid through the higher interest rate. Because closing costs take a long time to recuperate with a conventional loan, the no-fee mortgage is also a great option for those who don’t plan on living in a home for a long time. Proper knowledge of your financial situation and plans can help you better determine if this type of mortgage is for you, or if you should take a more traditional route to becoming a home owner.

Hidden Dangers in Mortgage Fees: Don’t Pay Junk Fees!

Hidden Dangers in Mortgage Fees- Don’t Pay Junk Fees- 150x150Becoming a home owner is something that most people aspire to, and it involves probably the largest investment that you will make over the course of your lifetime. After saving for years to be able to make a down payment, you have finally found the perfect home and the closing date is approaching. You have probably been advised by your real estate agent to set aside some money for the closing costs, but the long list of fees that you will be required to pay at closing will most likely still come as a surprise.

What are Closing Costs?

Closing costs are the charges that the home buyer will have to pay at the closing of the mortgage loan, besides the purchase price of the home. These costs can be recurring, meaning that you will have to pay them regularly, or nonrecurring, which are fees paid only once at closing.

Recurring costs, that will have to be paid not only at closing but also each month after, are expenses such as insurance, taxes, and private mortgage insurance, in case your down payment is less than 20 percent. These costs must be paid in advance by using an escrow service, which allows you to deposit the money into an account each month, which will be later used to pay your recurring costs.

Nonrecurring costs are paid at closing and never again. These expenses include the application fee, points on your mortgage, appraisal and origination fees and many others, depending on your lender.

Which Fees are Junk?

It is very important to differentiate between fees, and understand what every one of them represents. The majority of fees that you will be charged at closing are legitimate, and you will have no choice but to pay them, but there are plenty of fees that can be minimized or even waived. Knowing which costs are legitimate and which are junk can save you a nice amount of money at closing. Here are some of the fees that you will be charged and what you should know about each one of them:

  • Administration fee. This fee is charged by the lender in order to cover the cost of closing the loan, and it is a junk fee. You should try to have this fee waived, or at least lowered.
  • Application fee. This fee is charged solely for fill out your loan application, and it should be as low as possible, or even waived.
  • Appraisal fee. This is usually a necessary fee, as the lender has to know how much the home is worth, in order to give out a loan. But you should still try to negotiate a lower cost on the appraisal.
  • Credit report. You have the right to a free credit report per year, so you shouldn’t have to pay this fee. If you can’t take advantage of your free credit report, you should at least try to minimize it, because the lender will most likely overcharge you for it.
  • Document preparation fee. It is your lender’s job to prepare all the documents, and you’re paying them enough in other fees and interest, so you shouldn’t be charged for something twice.
  • Flood check fee. Your lender is required by federal law to obtain a certification that shows if the property is in a flood hazard area.
  • Lender fee. This cost includes several fees, such as attorney and courier fees, which you are required to pay, but you should also ask for a detailed breakdown to make sure that you aren’t charged excessively for any of these lender fees.
  • Origination and processing fees. These fees are associated with starting an account with the lender and processing your loan. Once again, you should try to minimize these fees.
  • Title fees. This cost includes fees like the escrow fee, messenger fees and the cost associated with recording the title on the deed. Carefully check a breakdown of these fees in order to find out if you are overpaying.
  • Wire transfer fee. This fee is charged in order to cover the cost of transferring money through a wire transfer. Check the other fees that you are paying to find out if you are not being charged twice for the same fee.

Protecting yourself from being charged junk fees or being overcharged on legitimate fees is a great way of making sure that you don’t end up paying significantly more that you should when the day of your loan closing comes.

Even after doing your research and familiarizing yourself with which fees are legitimate and which are junk, continue to carefully analyze every cost to protect yourself from being charged twice for the same fee. Also, remember that most fees are negotiable, so a little haggling never hurts. Buying a home is a demanding process, and the only way in which you can make sure that you won’t be overcharged and end up having to spend more than you have anticipated is to do your homework beforehand and be prepared on the day of the closing.

How to Get the Most Out of Mortgage Escrows

How to Get the Most Out of Mortgage Escrows- 150x150Two of your obligations as a home owner are to pay the property taxes on your home and to make sure that the insurance is up to date. Failing to be responsible by not paying your taxes and homeowner insurance on time will have a negative effect on your lender, as they can lose the money that was lent to you if something happens to the property. When you acquire a mortgage loan, you have the option of using escrow, but sometimes this can be mandatory.

What is a Mortgage Escrow?

When taking out a mortgage loan, you have the option of signing up for an escrow account. This account will hold money for some of your bills, like property taxes or homeowner’s insurance. The amount that will be needed to pay these bills will be added to your monthly mortgage payment. Then the money is used by your lender to pay your property taxes and insurance. It is the borrower’s duty to deposit money in the escrow account monthly, with the mortgage payment and, when the time comes to pay your taxes and insurance, the lender will see to it that these payments are made on your behalf.

The escrow service can be optional, but many lenders will require you to pay these home bills through escrow, in order to protect themselves. Having your home insured against hazard and seizure for back taxes, gives peace of mind to lenders, so they can use your home as collateral for the loan.

Usually, your monthly mortgage payment will include the payment for the insurance and property taxes. When closing on the loan, if there are only a few months left until the property taxes are due, you may be required to make a bigger deposit so the taxes can be paid in full. Also, if the taxes and insurance go up, you will be required to make a larger escrow payment, which will of course affect your monthly mortgage payment.

Benefits of Mortgage Escrows

Mortgage escrows do not only benefit lenders. They can also benefit you, the borrower, mostly by making your life easier. While the lender uses mortgage escrow as sort of an insurance in case you default on your loan, such an account will mostly help you by making the paying of your property taxes and insurance more convenient. Here are two important advantages of using mortgage escrow:

  • Convenience. Keeping track of all your home related payments, such as utility bills, taxes, and insurance can be a real hassle, especially if you are not organized, or don’t have the time to deal with this aspect of being a home owner. City, town or county tax payments will probably have to be sent to different places and at different times, increasing the risk of just forgetting to send a payment. Because the escrow includes all your tax and insurance payments into your monthly mortgage payments, you won’t have to deal and keep track of each individual bill. Managing your budget is also a lot easier because you will make smaller payments every month and won’t have to come up with a large amount of money when the taxes or insurance are due.
  • No late fees. Because your lender has the responsibility of paying your property taxes and insurance, you won’t have to pay the late fees if a payment isn’t made on time. The lender will have to cover all of the penalties, as long as you are on time with your monthly mortgage payments. Lenders use sophisticated systems and software to keep track of payments, so it is very unlikely that they will miss or make a late payment. Being late on your insurance payment can have graver consequence than just paying a late fee. The insurer can actually cancel your coverage, so using a mortgage escrow is very advantageous if you are not well organized.

Disadvantages of Mortgage Escrows

Like most services, mortgage escrows come with a couple of disadvantages. While having most of your mortgage related bills bundled into one monthly payment is a great thing that makes your life easier, it can also mean trouble for people whose income fluctuates from month to month. Because you are required to make an equal payment into your escrow account each month, using this service will create difficulties in managing your budget if you are counting on a quarterly or annual bonus, for example, to make your tax and insurance payment.

Another disadvantage is that the money accumulating in your escrow account doesn’t generate any interest like it would if you kept it in a personal savings account. Not using mortgage escrow means that you always have access to your money and can invest it into something that will earn you a higher return.

When buying a home, you should first find out if the lender requires you to use mortgage escrow. Secondly, before deciding if this is the best choice for you, you should carefully weigh in on both the advantages and disadvantages of this type of account. While mortgage escrows can make it more convenient for you to deal with some of your home bills, they also require you to pay a monthly amount that won’t generate any interest over time. Mortgage escrows are a great choice for someone who doesn’t have the time to keep track of all their property bills and doesn’t want to deal with having to make a lot of payments throughout the year.

Hidden Dangers in Lending: What Isn’t Disclosed to Borrowers

Hidden Dangers in Lending- What Isn’t Disclosed to Borrowers-150x150The Truth in Lending Act was introduced in 1968 as a way to promote fair lending practices and to protect borrowers who deal with lenders. The most important part of the Truth in Lending Act refers to what type of information has to be disclosed to the customer before giving them a loan. This information must be presented to the borrower in writing before closing the loan, and possibly even on the monthly billing statements.

The main goal of the Truth in Lending Act is to protect borrowers from unethical lending practices. This act makes it illegal for lenders to withhold important information regarding your loan, therefore protecting you and the economic activity that influences several parts of the economy, such as the housing market, which relies strongly on people who make purchases using credit cards or loans.

What Is Disclosed

The Truth in Lending disclosure statement must include a few important elements of the mortgage loan that you are closing. Understanding the contents of this document will help you better understand what your rights and responsibilities are. The Truth in Lending disclosure statement is only used for fixed-rate loans. Because the interest rate fluctuates on an adjustable-rate loan over its lifetime, it is impossible to determine how much the payments and interest rate will be. Here’s what the Truth in Lending disclosure statement contains:

  • The financed amount. This represents the amount that you are borrowing. This amount doesn’t include the interest rate, but includes other charges that are part of the loan which will be removed from the total if they are paid up front.
  • The Annual Percentage Rate (APR). The APR is going to be the interest rate plus a few additional costs that you are going to be paying.
  • The finance charge. This is the total amount that you will be paying on top of the financed amount, and it only changes if you make late mortgage payments and penalty fees are added, or in case you pay off your loan earlier than scheduled.
  • The total payments. This is the total amount that you will pay over the life of the loan. It includes the financed amount, the interest rate, and all other costs.
  • The prepayment penalty. Some mortgage loans include a clause that requires you to pay a penalty if you pay off the loan before a certain period of time.
  • The payment schedule. This part of the Truth in Lending disclosure statement explains how many payments you will have to make until the loan is paid off, and how much your payments will be.

What Isn’t Disclosed

Federal law doesn’t require lenders to disclose certain aspects of your loan. Some lenders choose to disclose these aspects, but it is mostly your duty to find them out before closing a loan. Here are some of the most important parts of your loan that may not be disclosed by your lender:

  • All of your lender’s fees. Unlike fees such as mortgage points, which are charged as a percent of the total loan amount, other fees that your lender will charge you are not based on the size of the loan. What’s worrying is that, even if you figure out what these fees will cost you, the lender will not be committed to that amount and can charge you more at closing. A good way to counter this practice is to ask your lender to give you a signed document which includes all of the fees that you will be required to pay.
  • The margin. Only applicable to adjustable-rate mortgages, the margin is the percent that the lender will add to the interest rate when the rate is adjusted. You will be made aware of what the interest rate will be, but not the lender’s markup, so it’s a good idea to ask them to give you the margin in writing as well.
  • Simple interest loans. Find out if the interest rate on your payments accumulates daily or monthly. In case you have a simple interest loan, the interest rate will accumulate daily, which means that you will have to pay some large penalties if you fall behind on a monthly payment.
  • Subordination policy. You may be prohibited from refinancing your first mortgage by the lender of your second mortgage. Subordination policies vary from a small fee to prohibition, so you should find out what the lender’s subordination policy is before taking out a loan.
  • Mortgage insurance. Normally, people who can’t afford to make a 20 percent or more down payment are required to pay mortgage insurance. Unfortunately, if you are not careful when closing a loan, you might be required to pay mortgage insurance even if you put the 20 percent down. Make sure you find out if you are required to pay mortgage insurance before signing anything.

When taking out a loan, keep in mind that while the law is mostly on your side, it doesn’t cover all aspects of the loan. The lenders are required to disclose elements of the loan that are very important, but there are others that are not disclosed. While some of them may not matter much, there are some hidden dangers that will end up costing you money over time and provoke unnecessary stress.

Negotiating the Closing Costs

negotiating closing costs- 150x150Once shopping around for an affordable mortgage and suitable lender has been finalized, the more intricate negotiations begin. Within three days of receiving a borrower’s loan application, the lender issues a ‘good faith estimate’, or GFE. These documents illustrate a detailed listing of ‘estimated’ closing costs involved with the funding of the mortgage loan, which will include all fees, appraisal cost, premium for the title insurance, and a partial interest payment for the month. There are two primary categories of charges contained in the documentation – lender or broker fees, and third-party fees.

Categories of Charges

Lender Fees
The first order of business, and the wisest advice, is to find out the details by asking for a specific explanation of each cost involved. Each cost contained within the GFE is broken down by numerical code, from 800 to 1300. Generally, the ‘negotiable’ lender fees are within the 800 range, such as application, origination, commitment, discount, broker, as well as tax and underwriter costs. Some fees can be waived, reduced, or applied toward the closing costs, depending on the lender. Items detailed in the 1000 to 1200 range are usually non-negotiable expenses, such as taxes, city or county documentary stamps and recording fees, and any prorated interest charges.

Third-Party Fees
The third-party category of fees is more difficult to negotiate, and a few appear in the 800 section such as the appraisal, inspection, and credit reporting costs. Though the lender should pass these along without surcharge, and may have been contracted by a set price, there is room for some flexibility. The greatest potential for savings is in the 1100 section, which covers the title insurance, search, and exam, the attorney fees, and the settlement costs. While some lenders prefer in-house affiliation with these services, all are indeed negotiable, and can be shopped for more affordable rates.

While some fees for services are regulated by federal or state government agencies due to the real estate transaction procedures, there is still plenty of cost flexibility when it comes time to negotiate the bottom line on a mortgage.

Is Refinancing With No Closing Cost Possible?

finance-150x150When it comes to purchasing a house, there are often huge fees that you have to provide upfront. It’s possible that you can be approved for a mortgage loan and not have enough money for closing costs. In some cases, you can ask the seller to take on the responsibility of the closing costs or roll the costs into your mortgage.  But is it possible to avoid closing costs when you refinance a mortgage? In a word, yes. With some research on your part—and a careful look at the fine print—you can refinance your property without any form of closing fees.

Shop Around and Negotiate Terms

To begin with, it’s important that you stay alert to hidden fees that might take the place of formal closing costs. It is actually possible for a “no closing cost” loan to be more expensive overall than a standard refinance, so you should proceed with caution. Inquire about the specific terms before committing to a lender, and make sure that your idea of “no closing costs” corresponds with the terms the lender actually offers. Consider taking some research steps that can save you thousands:

  • Begin by meeting with a housing counselor endorsed by the United States Department of Housing and Urban Development. The counselor can clarify what lenders and programs you should look at, and might even participate in negotiations with a lender.
  • Identify a lender that advertises refinances without closing costs. If your current lender is not on that list, you might still talk with them first. It’s possible that they will waive some of their usual fees rather than lose your business.
  • Download the worksheet for mortgage shopping offered by the Federal Reserve Board. With the questions on this checklist, you can make an informed comparison of the lenders you interview.
  • When you talk to prospective lenders, ask them to clarify what exactly is meant by “no closing costs” in their refinance program. They may be offering a loan structure that doesn’t include any out-of-pocket costs for you, but those costs might be rolled over into the loan itself, or recouped by charging higher interest rates. Ask for a comparative break-down of the refinance costs with the “no closing costs” option, and without it, so you can identify any hidden costs.
  • Get a Good Faith Estimate. The federal Real Estate Settlement Procedures Act needs lenders to produce prospective borrowers with a good faith estimate of the comprehensive costs of a loan. Ask each lender for this estimate so you can compare the different offers.
  • Read the fine print. Before signing your refinance, carefully read all the fine print to ensure that the actual loan matches the terms you have agreed to.

APR at a Glance

Another quick way to assess the comprehensive costs of a refinance is to inquire about the Annual Percentage Rate, or APR. The APR actually combines the costs of insurance, interest, and closing fees, so even if a lender has hidden the closing fees under some other designation, the overall cost will be revealed when you compare the APR of different lenders.

If you avail yourself of some free expert advice and take the time to do some comparison shopping among prospective lenders, read the small print, and ask for the right revealing reports, you can refinance your property without closing costs—either overt or hidden.

Good Faith Estimates

Good-Faith-EstimateWhen the potential home buyer has narrowed the field down for the best mortgage lending option, the next strategy is to acquire a Good-Faith Estimate (GFE) from one or two prospective lenders. Any lender is required by federal law to provide a breakdown of the closing or settlement fees associated with the loan offer. While this is only an estimate, it does allow a detailed review of important information regarding fees controlled by the lender, by the third parties involved, and those that can be negotiated by the buyer for better pricing options. The GFE must be provided to the applicant within three days of applying for a mortgage loan. Likewise, since the closing costs can range from 3% to 5% of the purchase price, it is wise to have the GFE well in hand before signing the loan commitment.

Lender Category Fees
The lender’s fees, also called ‘loan origination’ costs, cover any discounts, credit searches, assumption, broker fees, tax-related services, application, commitment, rate locks, wire transfers, as well as all processing and underwriting costs. Some of these can be negotiated for pricing modification, and if any charges appear vague or questionable, it is best to request verification.

Third-Party Category Fees
These expenses cover services the lender has set up via affiliate arrangement, and are not supposed to be value-added in terms of mark-up. These include settlement costs, closing or service charges, property appraisals, surveys, title insurance, searches and examination fees, city or county doc stamps, and all document preparation and recording via notaries and attorneys. They may also include interest pre-payment, mortgage or hazard insurance, and property taxes as well. In general, there is not a significant amount negotiating flexibility with these costs, but by examining each one through a competing proposal, a borrower can request a better detailed explanation.

The GFE is the most financially beneficial tool to utilize when a borrower is reviewing the best and most affordable mortgage options, and allows the best opportunity for cost reductions and savings options during the closing process before putting their signature on the dotted line.

Low Mortgage Rates – How to Find Them

There are a variety of ways you can secure the best mortgage rate possible. As a consumer, you must do careful analysis of the housing market before you jump into a mortgage. Here’s a guide to find great mortgage rates.

Compare Rates All Around

compare-mortgage-ratesFirst of all, it’s crucial to shop around. As a borrower, you’re entering into one of the most important financial decisions of your life. It’s important not to rush headlong into something you may regret. All you have to do is look a variety of different places. You should investigate at your local bank, online, and with different lenders.

Always compare interest rates and make sure you’re aware of any fees involved with mortgages. Take a careful look at any prepayment penalties, and be sure that you can refinance without paying too many fees if the need arises.

The $1,000 Rule: A Rule of Thumb

Generally, a lender that charges you less than $1,000 in fees is offering a good deal. However, be on your guard to make sure you don’t get tricked into any hidden fees. Good credit will really help you lower interest rates on a mortgage. Before you get involved in any sort of borrowing scheme, you need to be sure that you’ve got the credit to earn your loan. You can get a free credit report from the three major bureaus, which are Experian, TransUnion, and Equifax. If there are any mistakes on your credit score, be sure to fix them.

Fix Credit Discrepancies

Don’t get stuck with an interest rate you don’t deserve. And don’t be afraid to dispute any credit discrepancies that might show up on your credit report. Paying your bills on time is the number one way to keep your credit score high. It makes it a lot easier to negotiate with a lender when you’ve got proof that you’re a responsible bill payer. If you’re applying for a mortgage, try to be sure you don’t have any late payments on your credit report for at least six months before you fill out the application. Lenders want to be sure that they’re entering into an agreement with someone who can pay bills on time. Foreclosure are extremely costly for most lenders, so they want to avoid that if it all possible.

Pay Down Pesky Credit Card Debt

pay credit card debtsYou absolutely must pay down any credit card debt that you’ve got. This will help you boost your credibility with lenders. Of course, the amount of principal you can put down will strongly affect your interest rates and your monthly payments. As a rule, it’s a good idea to put down as much principal as possible on a home. Don’t ever get involved in adjustable rate mortgages. Fixed rate mortgages are much better, as you can be totally aware of how much you owe every month. If you are applying as a couple, then you should carefully budget your monthly income so that you can afford your mortgage. Never fall behind on a mortgage. This will negatively affect your credit score and could drive interest rates up. Only obtain a loan from a lender that is licensed and regulated in your state. You will benefit highly by doing some investigative work before you enter into a mortgage.