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Deal of the Day by Kelli B. Grant (Author Archive)
5 Mortgage Fees to Watch Out For
THE SUBPRIME CRISIS is providing few, if any, signs of abating. Major lender Wachovia (WB) recently stopped offering mortgages through brokers, and industry stalwarts Fannie Mae (FNM) and Freddie Mac (FRE) are teetering on the financial brink.
Hoping to put the housing market back on stable ground, Congress passed a $300 billion housing relief bill over the weekend (the president is expected to approve it shortly). But even with the help of the bill, which aims to bolster Freddie and Fannie and provide aid to troubled homeowners, things will remain shaky, especially for borrowers.
"They're trying to keep the sand castle up," says Keith Gumbinger, a vice president at HSH Associates, a mortgage-information firm based in Pompton Plains, N.J. "Ultimately it's the borrower who's paying for all this reform."
Faced with plunging property values and rising defaults, lenders are charging borrowers higher mortgage rates and adding fees, explains Gumbinger. Not all these added costs are set in stone, however. Vigilant shopping and a little haggling can go a long way toward landing a fairer price.
Here are five fees to watch out for and how to avoid paying them:
Application Fees
Just because the ad says "no application fee" doesn't mean there's no fee at the time you submit a mortgage application, warns Holden Lewis, senior reporter for Bankrate.com (RATE). "Each lender gives different names to its fees, which makes it hard to comparison shop," he says. Fees paid outside of closing — meaning at the time you submit loan paperwork — typically include an application fee (an average $252, according to HSH), upfront property appraisal ($331) and credit check ($33). They may be listed separately or lumped together as a "document-processing fee." To avoid overpaying, ask lenders for a good-faith estimate of mortgage costs. While lenders are under no obligation to provide one, most will, he says.Yield Spread Premiums
One of the dirty little secrets of the mortgage industry is the yield spread premium. In return for arranging loans with inflated interest rates, some brokers receive fattened payments — referred to as the yield spread premium — from lenders, says Allen Fishbein, director of housing and credit policy for consumer advocate Consumer Federation of America.Even a slight difference in rate, say 6.779% instead of 6.495%, amounts to nearly $17,000 in extra interest over the life of a 30-year $250,000 loan. To avoid getting suckered, ask your broker whether the lender pays them a flat rate or percentage commission based on loan terms. Also, obtain a copy of your credit score and use Fair Isaac Corporation's MyFICO.com to get a realistic estimate for a 30-year fixed mortgage rate based on your score.
Risk-Adjusted Rates
Getting deemed a risky borrower is no longer just a matter of a low credit score. Lenders now consider other risk factors. Buy in an area that's seen values drop precipitously — such as Florida or Las Vegas — and you can expect a higher rate, says Fishbein. The good news is that each lender gives different weight to individual risk factors. So make sure to collect bids from various lenders.Down Payment Penalties
The days of 0% down for a mortgage are over, says Fishbein. Without a down payment of at least 20%, prospective home buyers will undoubtedly get hit with a higher interest rate and need to pay for more points. (Each point usually amounts to a fee of about 1% of a mortgage.) Also, if a buyer can't put 20% down, they'll need to get private mortgage insurance, which typically costs 0.5% of the loan. Again, shopping around for lenders who charge more favorable points and PMI charges can help lessen the blow.Closing Costs
"The way closing fees are disclosed is, frankly, quite bad," says Gumbinger. That's problematic, considering these fees amount to 2% to 5% of the home's price. Location plays a big role since taxes and other requirements vary by state. Some states require expensive attorneys to oversee the closing process; while others allow a title agent or escrow officer.Ask potential lenders for a good-faith estimate of closing costs. Then, check in weekly with whoever is handling the closing to see if there are any changes in either lender or third-party fees. Here's how to keep these fees under control:
Lender fees. Ask which expenses go into each fee and challenge anything that seems unnecessary or inflated, like overly pricey charges for faxing documents or overnight delivery. Be particularly cautious about fees prorated based on the closing date, says Lewis. Such fees are easily miscalculated, especially if the closing date changes.
Third-party fees. Home buyers also have to deal with title insurance companies, surveyors and inspectors, all of which have their own fees, says Fishbein. Comparison shop at other local companies to ensure you're getting a competitive bid. If you find a better rate, ask the lender to use that vendor instead.
Also See:
Seeking a Mortgage in Today's Market Is Not EasyHow Much House Can Your Afford?
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