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Guest Post: 4 Home Loan Fees to Be on the Lookout For

February 9, 2012 · Filed Under Random · 18 Comments 
Today’s post has been contributed by Sara Lennon on behalf of Merlin Insurance – the Quebec Insurance Broker.

For most people, buying real estate is something you do once or twice in your lifetime, giving you few opportunities to familiarize yourself with the process. You are swamped by mountains of paperwork to sign, a strange new vocabulary to deal with, and numerous fast-talking sales people – from real estate agents to mortgage brokers – who smile, point and tell you where to sign.

It’s an exciting time, but it’s all too easy to lose track of what you’re paying for and how much everything costs. Aside from the mortgage, there are numerous charges lumped into ‘closing costs’. Let’s look at four home loan fees to be on the lookout for; this may save you a few hundred dollars.

What are Closing Costs?

Closing costs are the several dozen potential expenses associated with purchasing and financing real estate. They are categorized as “recurring” and “nonrecurring.”

Recurring costs:

Recurring costs not only get paid at closing, but also on a monthly basis thereafter, and include real estate taxes, homeowners insurance, and, if you’re putting less than 20% down, private mortgage insurance (PMI). These expenses need to be paid in advance at the time of purchase, so put them in an account to cover next year’s obligations.

Nonrecurring costs:

Nonrecurring costs are also paid at closing. These include:

  • Application fee
  • Loan fees such as appraisal, credit report, and underwriting fees
  • Any lender-required inspections
  • Broker’s service fee
  • Federal Housing Administration (FHA) fees
  • Veteran’s Administration (VA) fees
  • Title charges
  • Land survey

Most Common Fees

The four most common home loan fees are:

  • Application fees
  • Appraisal fee
  • Private Mortgage Insurance
  • Prepaid Interest

How much should they cost?

The Federal Reserve Board provides some general guidelines for how much these fees should cost:

  • Application fees range from $75 – $300 (including the cost of a credit report for each applicant)
  • Appraisal fees range from $300 – $700
  • Private Mortgage Insurance can be up to 1.5% of the loan amount prepaid and between 0.5 – 1% of the entire loan amount annually.
  • Prepaid Interest varies depending on loan amount, interest rate and number of days that must be paid. $300 – $700 is not that uncommon.

How to Save:

  • Try and make a larger down payment to avoid PMI. If you can afford to make a 20% down payment, do so. PMI is hard to cancel, can be expensive, and offers no real benefits.
  • For lower appraisal fees, direct your loan officer to work with local appraisal companies. Local appraisers have a deeper knowledge of the surrounding neighborhood and will likely be more readily available for the home inspection, to speed your appraisal process.
  • Negotiate with the seller to reduce closing costs. They may be willing to pay your application or appraisal fee for a better deal.
  • Look for special deals on lenders websites. You might be able to apply for free or save on the cost of a credit check. Try to apply direct if possible, rather than going through a broker. You can compare deals online and go straight to a lender if there’s a particular deal you want to apply for. Don’t let a pushy salesperson force you into a bad deal.

Noodling Over a Mortgage Refinance

February 4, 2009 · Filed Under Finances · 13 Comments 

With all the news about "historically low interest rates,"  I lately find myself giving a lot of thought to refinancing our mortgage.  I am sure that a number of you have been considering and investigating it as well.  After looking into it, however, I’m not convinced that refinancing is the best course of action for me at this point in time.

Rules of thumb for a refinance

I’ve heard various criteria for deciding when it is a good idea to refinance (like if you can save 2% off your rate, for instance, or figuring out if it is better or not based on how much longer you’ll live in your house).  The problem with that, of course, is that a simple formula can not possibly apply accurately to the unique circumstances of each individual.  I think a better course of action is to look at the details of the refinance tailored to your specific situation.  (BTW, do people actually know how long they will live in their house?  I’m sure there are a few stable people out there, but it just seems crazy to me to know that you’ll be living in this house for 10 or 20 years or whatever! – I guess because we’ve lived in 6 different places in the 12 years we’ve been married).

Considerations for refinancing a mortgage

There are a number of reasons why you might want to refinance your mortgage.  In the olden days (they weren’t  really that long ago, but they sure seem like it), your home would make a great ATM for whatever you wanted and couldn’t afford.  I didn’t recommend this in years past so I am certainly not going to recommend it now as house values plummet (Seriously, this is a really bad idea right now).

Some better reasons to refinance

A much better motive for refinancing in the current environment would be to secure a "historically" low rate.  Especially if you have an adjustable rate mortgage, this feels like a good time to lock it in (to be honest, we currently have an ARM though there are 5.5 more years before the rate adjusts for the first time).

Another great reason would be to lower your monthly payment.  If you can get a significantly lower interest rate, then your monthly payment might decrease quite a bit (and that extra cash flow would surely help out these days).  If you are doing this, however, keep in mind how long you’ll be making these payments.  It might sound like a good idea to save a few hundred bucks each month, but if you are trading in a mortgage that you’ve had for a number of years and starting over with another 30 year term, you might end up paying a ton more money over the length of the mortgage).

Some (potentially) bad side effects of refinancing

If you, like me, do not have very much equity in your house, then refinancing might drop you into the realm of the dreaded private mortgage insurance (PMI).  Unfortunately, after the events of the past year or so, I would guess that a lot of us find ourselves with less than 20% equity which is the typical cut-off for PMI.  I currently do not pay PMI but if I were to refinance, I would be required to start paying it.  Depending on the type and amount of your loan, the PMI could run as high as hundreds of dollars a month.  Just to review: PMI is bad.   It’s extra money (on top of the principal and interest) that you have to pay each month that doesn’t reduce the principal…it just disappears into the ether (from your perspective, that is…it certainly ends up someone’s pockets).

Of course, do not forget that refinancing a mortgage is an expensive proposition.  You will need to pay closing costs and lender fees and all that junk to get the refinance done.  In fact, if you end up paying points on the mortgage, the refinance itself could run up near or over $10,000.  I do know of some companies, like CapCenter Mortgage , that advertise no closing costs – so that could potentially save you a lot of money.  Most of the mortgage companies out there, however, will take their share.

To refinance or not to refinance?

In my specific situation, I really don’t know if it makes sense to refinance at the current time.  I do have an ARM that resets in 5.5 years so it would certainly be advantageous to lock in a low rate.  I would also love to refinance into a shorter term loan that could save me more north of $100,000 compared to continuing on my current 30 year path.

On the other hand, I do not currently pay PMI and do not like the idea of starting to pay it.  In my specific situation, I could refinance into a 20 year mortgage and end up paying about the same monthly payment but for 7.5 fewer years…plus a PMI of almost $300 per month!  And don’t forget the cost of the refinance itself – the estimates I’ve gotten from one company range from $5000 to over $9000!

So the question becomes,would I be better off using that cash to pay down my current mortgage a bit and then applying the extra I’d be paying for PMI to accelerate my monthly mortgage payments?  I don’t know…I think I’ll create a spreadsheet and run some numbers for a future post (woohoo – a spreadsheet!) (BTW, Dave Ramsey has a pretty useful mortgage calculator for playing around with these numbers)

What are you thoughts on this?  Have you recently refinanced?  Have you been considering it?  Have I missed anything else that I should be considering?

Photo Credits: Mirko Macari

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