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.

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.

Mortgage Loan Points

mortgage loan pointsAmong the decisions a home buyer must make before taking on a mortgage loan are the advantages or disadvantages regarding the paying of points. Beyond the loan term, loan amount, and mortgage interest rate, points play an important part in financing a home as well as affecting the final monthly payment amount. Points are lender-charged fees applied as a condition of loan approval, or allowing more acceptable loan terms. Some lenders apply points as part of closing costs, while others are applied to the loan principle. They are a revenue source for the lender beyond what is earned through the applied interest rate charges.

Discount Points versus Origination Fees
While most lenders assess a loan with one or two points or more, and some with none at all, they can certainly add to the cost of acquiring a loan if applied. Each point represents 1% of the total loan amount, so a single point added to a $200,000 mortgage would yield an additional $2,000 to the cost. The points are structured in one of two ways – discount points or origination fees. The discount type are tax-deductible points applied based on the interest rate, and paid upon loan approval, and will increase if mortgage interest rates decline. Origination points, on the other hand, are charged during the loan closing process, or in advance, are not tax-deductible, and are fees applied to the loan as a lender-charged expense for the loan approval. Your loan term has no bearing on the amount of points charged. So a 30 year mortgage could have the same amount of points as a 15 year mortgage.

Front End or Back End Benefits
mortgage benefitsThe points determine how a particular mortgage loan is structured. The differences come into play when a borrower has little money available toward closing costs, and would opt for a higher interest rate, versus a borrower who is better able to absorb the upfront expense of the discount points. Conversely, if a borrower must maintain a certain monthly payment amount, they can opt for more points in exchange for a lower interest rate to lower the monthly payment. In essence, paying the upfront points fee at closing would reduce the overall pay-out over the life of the loan.