Surprises are not always good! When it comes to mortgage, you have to make sure you understand all the fees and charges involved before making a choice.
Amidst the thick pile of paperwork filled with the technical jargons, one gets tempted to skip the details and make the buying decision in haste. But since home is the most precious investment you are going to make in your life, every detail is worth a read! Keeping a track of the fine print makes sure you understand the real cost of the mortgage with all its ins and outs.
One should realize that there’s more to mortgage than just the principal and interest amount. Closing cost is the sum total of various fees payable at the time of closing a real estate transaction (the moment when property is actually transferred to the buyer). These costs are in addition to the down payment on the home. Closing costs are of two types, recurring and non-recurring.
• Recurring Costs primarily consist of real estate taxes and homeowner’s insurance.
• Non-Recurring Costs consist of various one-time fees such as
origination fee, application fee, appraisal fee, underwriting fee, document preparation fee, etcetera
Closing costs are either paid entirely by the buyer or partially by the buyer-and-seller in various proportions. The usual closing cost amount to 2-5% of the home price. So on a home that costs you $100,000, you will be liable to pay $2000 – $5000 as closing costs.
The closing costs involve may vary from plan to plan and consist of the following types of recurring and non-recurring costs –
1. Booking Fees – Some mortgage plans come with a booking fee that is payable upfront. Other plans do not involve such fee.
2. Mortgage Broker Fee – The fee a broker charges for advising and arranging a mortgage that meets your specific loan needs. If the broker charges no fees, the chances are that he’ll earn his commission from the lender.
3. Mortgage Arrangement Fee – The fee charged by the lender for arranging your mortgage. This fee is inversely proportional to the interest rate. The lower the rate, the higher the fee.
4. Early Repayment Charge – If you intend to repay your mortgage earlier than the agreed term, you will be liable to pay this charge.
5. Legal Fee – It consists of the costs incurred on fulfilling paperwork and legal obligations involved in buying/selling of property. This fee varies from one jurisdiction to other.
6. Origination Fee – This is relevant when you approach a lender through a broker. The broker paves the way to get the loan approved for you. As a high risk borrower, you will be liable to pay higher origination fee and vice-versa.
7. Underwriting Fee – This is the fee that the lender charges for underwriting the loan. This fee is not payable when you apply for a mortgage through a broker.
8. Application Fee – Lenders and brokers can pull out your credit reports virtually at no cost for the simple reason that they do it very frequently. But they charge a fee for it from the borrower anyway. This fee is known as Application fee.
9. Appraisal Fee – Many lenders make appraisal a precondition for approving a mortgage loan. An appraisal involves a licensed appraiser verifying the property’s sale price against its current market value. Appraisal fee is usually paid by the buyer.
10. Homeowner’s Insurance – While closing the deal, the borrower needs to produce a receipt of a full year advance payment of homeowner’s insurance premium. If the property comes under a flood hazard area, you need to include the flood insurance clause in your insurance plan.
11. Mortgage Insurance – The premium of mortgage insurance depends on the type of loan and the down payment made on it.
12. Property Taxes – Before the property is actually transferred to the buyer, one has to pay the due taxes on the property, if any.
13. Survey Fee – Sometimes the property (the land as well as structures on it) needs to be surveyed, especially in case of commercial property. Survey fee needs to be paid to the surveying company.
14. Inspection Fee – Some lenders are very specific about making sure that the property is in good condition when the deal is closed. Inspection fee is paid by either party to licensed home inspectors.
A Word of Caution
Have you been offered a ‘no-fee mortgage’ of late? You might land yourself in a trap if you are taken in by such loans without having a proper understanding of them. In a typical no fee mortgage, the borrower is not charged of the usual fees associated with mortgage including processing fee, appraisal fee, underwriting fee and so forth. Rather, your lender pays all the fees involved and in return you agree to pay back the mortgage at a higher interest rate. Though the high interest you pay on your mortgage is tax deductible, but you eventually end up paying more than what you would have paid on a regular mortgage. Somewhat similar are ‘super cheap mortgages’ that are offered at a surprisingly low interest rate but involve a huge fees.
If experts are to be believed, the borrowers should avoid both these luring deals and go for plain mortgages.