Mortgage Articles – For the smart consumer

Fees to Expect When Borrowing a Mortgage
All mortgage programs are not equal, but when you borrow a traditional fixed-rate mortgage you will have a fairly good idea of what you can expect from your loan and your lender.  The fees associated with mortgage loans are a different story. 

Fees are costs that are assumed by the lender and then passed on to the borrower at the time of closing. Generally, these fees are assessed in order to cover the administrative overhead of the lending agency.

The problem faced by millions of consumers every year is that different lenders refer to the same fees and costs in many different ways.  Some call them origination fees, others call them underwriting fees, and still others call them processing fees. There is little standardization among lenders in how fees are referred to.

Some lenders group similar fees together under the umbrella of one fee, while still other lenders break larger fees into smaller fees in order to make their fees look competitive.

Also some mortgage companies include the cost of title insurance in their loan disclosure statements, but others do not.  Another potential area where costs may differ is in estimated taxes.  Some lenders provide a realistic estimate of property taxes, but others fail to calculate tax estimates correctly.

Considering all of this, it is obvious why consumers are confused by all the fees and costs associated with borrowing a mortgage loan.  There is no true standardization between lenders, so consumers really have no way to tell for certain how much they might pay with any given lender.

Origination, Underwriting, Lender, or Processing Fees
These fees associated with mortgage loans are almost always the costs that the lender passes along to the borrower for the administrative work needed to process the loan at the time of the application.

Regardless of what your lender calls this administrative fee, it should never amount to more than one percent of the amount of your mortgage.  Also, this fee is generally deductible on your taxes during the year in which you purchase your home, but only if the fee is calculated on a percentage basis.

These fees are usually payable at the time of closing.

One of the most commonly misunderstood items on a loan disclosure statement is the difference between the loan interest rate and the annual percentage rate (APR).  The interest rate is the actual rate at which interest accumulates.  The APR is the cost of the loan as an annual amount.

Tax-Research Fee or Title-Search Fee
Before a lender funds the purchase of a home, an independent title-search or tax-researching agency performs services to ensure that there are no existing liens of the home at the time of purchase. This fee is usually around $100 and is paid by the borrower on the day of closing.

Appraisal Fee
Most lenders charge borrowers a fee equal to the cost of obtaining an appraisal of the property’s value.  Usually this fee is a few hundred dollars, but it may be significantly more for a buyer who is purchasing a multiple-unit residence.

The appraisal fee is almost always paid at the time of the mortgage application, or it may be wrapped into the lender’s application fee.

Documentation Fee
Most borrowers are required to pay the lender a fee for completing paperwork required to close the loan.

This fee should not be more than $100, and it is almost always paid on the day of closing.

Points or Discount Points
Points are usually equal to one percent of the amount of your mortgage amount, and they are generally paid by the borrower as a method to permanently reduce the interest rate on the loan.  Different lenders offer different ratios, but generally for every one percent that you pay upfront, your interest rate is lowered by 0.25%. Your lender may let you pay additional points in order to further reduce your loan’s interest rate.

Keep in mind that discount points are tax-deductible, because they amount to pre-paid interest.

Interest Rate vs. APR
One of the most commonly misunderstood items on a loan disclosure statement is the difference between the loan interest rate and the annual percentage rate (APR).  The interest rate is the actual rate at which interest accumulates.  The APR is the cost of the loan as an annual amount.  APRs are almost always higher than the actual interest rate, because they include the annual amount charged for each fee associated with the loan.

When you notice that a lender is offering a low interest rate, chances are that the APR will be higher than that of other lenders, because the costs are being passed on to customers in the form of fees and other costs.

Interest rates are determined by a combination of factors, including a series of financial indicators and the condition of the economy in general.  Because these factors often change rapidly, lenders often change their interest rate several times each day.

Prepaid Interest
Another tax-deductible fee often listed on a loan disclosure statement is prepaid interest.  Prepaid interest is usually the amount of interest that accrues from the day of the loan closing until the day when the first payment is due to the lender.  This particular cost does not always have to be paid in advance, and some lending agencies even refuse to charge borrowers interest in advance.

Watch Points and Origination Fees Closely, and Compare Lenders’ Policies
As mentioned above, origination fees should never be more than the one percent of the mortgage amount. Some lenders may attach a higher loan-origination fee to the loan disclosure for borrowers with less-than-sparkling credit.  If this happens to you, ask why you are paying more.  When the lender tells you that it is because your credit score resulted in additional work for them, demand that the fee be lowered to one percent of the loan amount, because regardless of your credit score, the lender is doing the same amount of work.

Discount points are tax-deductible, and paying discount points will reduce your interest rate by some percentage. 

When shopping for a mortgage loan program or a lender, ask the lender about the institution’s requirements for paying points and origination fees.  Federal consumer protection laws govern the maximum percentage that a lender can charge in applicable fees.  Some lending companies are more restrictive and limit their loan officers to 3% or less for the fees that they are permitted to collect from a borrower.

If you think that the fees on your loan are higher than average, ask your lender about it.  Generally, inflated fees are reduced when a consumer complains.  If your lender is not willing to reduce the fees, take this as a good indication that you might want to select a different lender for your mortgage needs.

Years of experience have provided realtors with expertise about which fees to expect when purchasing a home in your area.  Their experience may enable you to dispute higher-than-normal fees, lowering the overall cost of your new home.  If you need additional help understanding the costs and fees associated with a mortgage loan, ask your agent for help.  Chances are, he or she will either know what the fee is for or can ask around to find the information that you need.