Mortgage lenders may> be offering loans at record low rates -- but that doesn't mean they come cheap.
In fact, borrowers may see much of the savings they'd realize from lower rates wiped out by closing costs -- fees that are on the rise as lenders seek to pad their bottom line.
Frankly, lenders are struggling to make mortgages on a profitable basis in order to ensure survival, says Keith Gumbinger, vice president at mortgage information firm HSH Associates. And you can, as a lender, help to increase your profitability by an increase in fees.
As homeowners rush to lock in those rock-bottom mortgage rates, lenders costs of doing business increases, says Brian Smith, senior loan officer at Republic Mortgage in Seattle. For example, whenever a lender locks in a rate for a prospective borrower, it incurs administrative costs -- whether or not the loan actually closes. Should the borrower fail to get approved, change their mind or jump on a lower rate elsewhere, the lender is still on the hook for the costs. As these locks fall out, each loan gets more expensive for you [as a lender], so you pass on that cost, Smith says.
When shopping for a mortgage, ask lenders to provide you with written good faith estimates so you can compare costs, says Frank Ruzicka, a mortgage banker with Cornerstone Mortgage in St. Louis, Mo. Here are four fees to watch for:
1. Processing fees
Whether they re called administrative, application, underwriting or processing charges, these fees are on the rise as lenders compensate for the lower-rate loans that they offer to be competitive. A lender may offer a borrower a $140,000 loan at an attractive 4.875% and no points, for example, but slip in a $350 underwriting fee and a $350 processing fee -- in addition to their regular application fee, Ruzicka says. While charging an application fee of several hundred dollars is normal, adding several other charges for the same amount of work is not. Be sure to compare several lenders fees -- and question anything that seems redundant.
2. Fannie and Freddie s cut
On April 1, Fannie Mae and Freddie Mac yet again increased fees for loans they purchase or insure. Depending on the borrower s credit score and the size of the loan relative to the home s value, these so-called loan-level price adjustments can range from 0.25% to 3% of the loan. Another 0.25% to 3% is added for cash-out refinancing (when a borrower refinances with a loan that's bigger than what they owe on their existing loan -- so they have some cash left over).
For someone in the 660 to 679 credit score range, a 30-year fixed-rate mortgage that is 85% of the home s value would incur 2.5% in fees. (Prior to April 1, that same loan would have cost 1.75%.) And if the borrower took cash out, another 2.5% would be added for a total of 5%.
To figure out if you'll be hit with these charges, ask your lender or mortgage broker if your loan will be sold to or insured by Fannie or Freddie. Today, that s the case for 56% of all outstanding mortgages.
3. Appraisal fees
Thanks to the Home Valuation Code of Conduct -- a set of regulations on property appraisals that goes into effect May 1 -- lenders who deliver loans to Fannie Mae and Freddie Mac will be prohibited from selecting or communicating with appraisers. This may cause them to collect appraisal fees upfront no matter if the loan goes through or not, says Smith.
If a borrower wants to refinance a home they think is worth $300,000, for example, but an appraiser values it at $200,000 and the loan can t go through, the appraiser will still have to be paid. I ve never collected appraisal fees upfront, but I ll have to start doing it, Smith says. I can t afford to risk $400 every time I talk to someone about a refinance or purchase.
Appraisers are also being required to use a new form that they estimate will add 45 minutes to the time it takes to complete an appraisal. We charge by the hour, so it will drive up costs, says Brad Charnas, an appraiser in Cleveland.
4. Private Mortgage Insurance
As mortgage insurance companies move to so-called risk-based pricing, private mortgage insurance, or PMI, which is required of anyone purchasing or refinancing a home with less than 20% equity, is getting more expensive for borrowers with lower credit scores, says Tom Taggart, a spokesman for PMI, a San Francisco-based mortgage insurer. Someone buying a $200,000 home with 10% down, for example, would pay $1000 a year in PMI if they had a 700 or higher FICO score, but if their score was 680, they'd pay $1,162 a year.