October 26th, 2012
Yesterday, we talked about lender fees and third party fees. Today, we’ll talk about mortgage fees, and other fees that aren’t covered in the three other categories, but are important for you to know.
Points – A point is 1% of the loan amount. What that means to you is that points are a one-time charge that may be negotiated with the lender, usually to reduce the interest rate you pay over the life of your loan. For example, one point on a $100,000 loan would be $1,000. In some cases, especially in refinancing, points can be financed by adding them to the amount that you borrow. However, if you pay the points at settlement, they are deductible on your income taxes in the year they are paid.
Prepaid Interest – Your first regular mortgage payment is usually due about six to eight weeks after you settle (for example, if you settle in March, your first regular payment will be due on May 1, and this May payment covers the cost of borrowing the money for the month of April). Interest costs, however, start as soon as you settle. The lender will calculate how much interest you owe for the part of the month in which you settle (for example, if you settle on March 16, you would owe interest for 16 days–March 16 through 31). The lender will want this up front.
Private Mortgage Insurance (PMI) – If your down payment is less than 20% of your home’s value, the lender may want you to purchase PMI to cover its losses in case you default on the payments. Typically, you will pay a PMI monthly along with each month’s mortgage payment. Your PMI can be canceled at your request, in writing, when you reach 20% equity in your home based on your original purchase price if your mortgage payments are current and you have a good payment history. By federal law your PMI payments will automatically stop when you acquire 22% equity in your home based on the original appraised value of the house as long as your mortgage payments are current.
Flood Determination Fee – A fee the lender may charge to determine if your home is in a flood zone, and if you’ll need to buy flood insurance.
Homeowners’ Insurance – The insurance policy that protects against fire, vandalism, wind, natural disasters (other than floods), and other hazards that can damage your home. Lenders require that you have this to protect their investment. You should also consider looking into additional insurance to cover your furnishings and belongings.
Escrow (or reserve) funds – You may be asked to add in money at closing to put in an escrow account to cover property taxes, insurance, and other costs. Even if you don’t pay this at closing, part of your monthly mortgage payment will probably go toward escrow. When the bills for taxes and insurance come due, the lender takes the money out of escrow and pays them for you.
Be cautious of “bundled fees” if they don’t expressly mention what is bundled. Some lenders offer a package deal that could be less then if you paid for all separately. However, you want to be able to compare apples to apples when you’re shopping around.
If there are any fees listed you don’t understand, ask for an explanation. Also realize that many fees, especially application and processing fees, are negotiable. Ask your lender to reduce or waive these fees; alternatively, the seller may be willing to pay them. Don’t be afraid to ask – after all, this is the biggest purchase you’ll ever make.