Understanding Mortgage Fees

In basic terms, mortgage fees are defined as charges by lenders for processing a mortgage loan, but these fees can be confusing to people since there are so many of them.

So, it's important for both real estate investors and their customers to understand these charges so you know the real cost of loans and to make sure all charges are legitimate. Armed with this knowledge, you can get the best mortgage deal for yourself and for your customers and ensure that you're not being overcharged.

As I explain mortgage fees, keep in mind that lenders have varying requirements so you may not have to incur the cost of every one of these charges.

Application Fee

This is the simply the cost of processing the loan. It's normally paid to the lender when you apply. It's usually non-refundable if you decide not to take the loan.

Appraisal Fees

This is an estimate of the market value of the property. The lender has the appraisal done to make sure the mortgage has a level of risk that's acceptable to them. It's usually done by a professional appraiser, who provides a written appraisal to the lender.

Attorney Fees

Sometimes, an attorney is required to prepare and review loan documents, so an additional fee is paid for document preparation.

Credit Report Fee

This is a charge for having a credit report pulled by the lender. Naturally, the lender wants to know the borrower's creditworthiness so that lender will get the information from one of the "Big Three" credit reporting agenciesEquifax, Experian, or TransUnion.

Document Preparation Fees

These are fees charged for the preparation of legal documents such as deeds of trust, the mortgage contract, etc. The fees may charged by the lender, broker, or the title company.

Earnest Money

This is money the buyer pays into an escrow account to show good faith to the seller; in other words, it demonstrates that they're serious about buying the property and are putting their money where their mouth is. It's usually a small amount of money and is paid by the buyer when an offer is made on the property.

Escrow Account Funds

The lender holds money in the escrow account for the purpose of paying of specific items. These items can include up to two months worth of private mortgage insurance, homeowner's insurance, hazard insurance, property tax payments, etc.

Loan Discount Points

These are fees that lenders charge in order to provide a lower interest rate. As a borrower, you can choose to get a lower interest rate ("buy down") by paying "points" in addition to the loan origination fee. Each point is equal to one percent of the value of the loan, and one point typically represents about one eighth of a percentage point.

Loan Origination Fee

This is a fee charged by the lender to cover administration costs; i.e., preparation, evaluation and submission of the loan. The fee is usually equal to 1% of the value of the loan. Origination fees may be as high as 2% if the loan is especially complicated. As a general rule, expect to pay no more than approximately 1%. Mortgage Broker Fee In some situations, you may prefer to work with a mortgage broker rather than directly with a lender. In that case, you'll pay the broker a fee for his or her services in addition to the lender's fee.

Mortgage Underwriting Fee

Lenders charge this fee for verifying the information on the loan application and making a final decision on loan approval. It also covers closing and funding costs for the lender. Typically, this is where the lender makes their immediate profit from lending (as opposed to profit over time from interest). Note: Brokers shouldn't charge an underwriting fee; they're not the ones underwriting a loan.

Prepaid Interest

This is the amount of interest that accrues between closing time and the date of the first mortgage payment. This fee is paid to the lender at closing time. Recommendation: To reduce the amount of prepaid interest, try to close at the end of the month. This will also reduce the amount of cash you need to come up with at closing time. Property Inspection Fee This is a fee charged by a licensed property inspector for determining the general physical condition of the property as well as pest inspection. Property inspections protect both the buyer and the lender.

Survey Fee

This is a fee charged by a licensed surveyor for measurement of a property's boundaries. The lender or title search company may require a survey in order to ensure that the boundaries have been upheld.

Title Insurance

This is vital protection for the buyer in case there are any unpaid mortgages or tax liens on the property that were overlooked during the title search. If title issues crop up, then title insurance pays for legal costs and reimburses the buyer for any other losses incurred.

Title Search Fee

A title search is vital because, as a buyer, you want to make sure the person selling the property is the legal owner. The title company analyzes all public records concerning the property in order to determine if any title defects could interfere with clear transfer of property ownership.

Summary

In this article, I covered the topic of mortgage fees. As I said earlier, it pays to understand these fees to make sure both investors and their customers get the best deal on a mortgage and to ensure that they're not being overcharged.

A good online source for getting a handle on mortgage fees charged across the nation is http://www.bankrate.com. This site will give you the highest, lowest, and average fees charged by lenders and brokers. I recommend you consult it on a regular basis to stay on top of the mortgage game.

Remember: As always, knowledge is power!

Jack Sternberg