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Junk Fees on a Mortgage Loan
by Dr. Oneida Cramer
The National Association of Realtors recently issued a warning to realty brokers about charging junk fees over and above their commissions. These extra fees must be accompanied by bona fide services on behalf of the consumers or else brokers may find themselves having problems with the federal government or private lawsuits (www.businesstoday.com/business/real_estate/harn01112002.htm). Specifically, regulators from the Department of Housing and Urban Development (HUD) are taking a closer look at the charges on government mortgage loans. It might behoove homebuyers to follow HUD?s example and compare costs on their own conventional home mortgages.
?I think probably premium pricing on a loan is a lot more significant than junk fees,? said Marvin Montgomery, Exclusive Buyer Broker with BuyerSide Real Estate (www.buyersiderealestate.com). Premium pricing a home mortgage should be handled like the shopping for any major purchase?it?s important for the homebuyer to shop around and compare costs both?junk fees?and interest rates?from one mortgage-company to another.
So, what are junk fees?
?Junk fees have been around for years,? said Montgomery. ?A junk fee would be any fee charged over the actual cost of that item. Outside junk fees, the other cost (on a mortgage) is strictly the interest rate being charged to a loan.?
?If they?re buying a house for $200,000, let?s say, paying 10% down or 20% down, then the mortgage company should provide a good faith estimate,? Montgomery said. The good faith estimate takes into account interest rates and all the costs associated with obtaining the loan. ?That would be a good faith estimate for that point in time?actually that day. Perhaps, tomorrow or next week or next month, the interest rate may be more or less.? In order to get a valid comparison, homebuyers must compare companies as of the same date or update what the interest rate would be on one particular day.
?It?s not an involved process,? Montgomery said. ?It?s what homebuyers should do.? The only consideration, when doing such comparison-shopping, is that a person should not have their credit pulled a number of different times because that will create a little ding on their credit report. To avoid such a problem, homebuyers can obtain their credit scores from one of the mortgage companies although some mortgage companies are reluctant to release this information, according to Montgomery. If that is the case, then the homebuyer can go directly to the agency. People have a right to know what is contained in their credit report, and they can find the credit union phone numbers in the local phone book.
So, what fees are found on a home mortgage document?
?Typically, a person would pay a 1% origination point fee (sometimes called a discount point), which is a fee to the mortgage company,? Montgomery said. ?That?s pretty standard in the industry.? This fee goes to the mortgage company as the basic fee for obtaining the loan from the final lender.
?There might also be additional discount points although with the low interest rates, today, there?s no need to buy down the interest rates,? Montgomery said. ?A few years ago, when interest rates were 9% and 10% or even more, people frequently brought down the interest rates by paying a point or two points or three points. But, today, with low interest rates, a typical proposal might include one or a half discount point or, perhaps, no discount points and just the 1% origination point.
An additional processing fee can also be charged from the mortgage company. This fee covers the administrative work of processing the paperwork and varies from about $275 to $500.
All other fees on a mortgage loan go ultimately to organizations or individuals who provide a service to the loan. For instance, the appraisal fee, around $375, is paid directly to the appraiser, or through the mortgage company to the appraiser. It?s basically the fee of the appraiser for placing the market value on the home. An underwriting fee, usually $200 to $300, goes to the final lender, which is the bank or financial institution that provides the money for the loan.
Title company fees may or may not be listed in a good faith estimate. Either the mortgage company does not list the fees because they lay outside the control of the mortgage company, or else the mortgage company includes the fees so they are not overlooked. The largest of the fees is the title insurance, an amount that can add up to 1% of the loan. Typically the seller pays the title insurance although the buyer could, on occasion, pay it. The buyer traditionally pays only the smaller portion of the title insurance, called the Mortgagee Policy, which is in the area of $175. Other title company fees include escrow fees, document preparation fees, messenger service fees, and recording fees for recording the title onto the deed. Attorney?s fees for preparation of the documents go to the attorney of the title company or to the title company. Last, a survey charge goes to the title company for arranging the survey, and this fee is ultimately paid to the surveyor.
?Some of these other miscellaneous fees are not large dollar items, maybe $50-$100. But they can vary by title company,? Montgomery said. Note, that even though a mortgage company good faith estimate may not include anything other than the actual loan costs, mortgage-company costs, and the final lender costs, the buyer is going to have to pay all costs. So, the buyer should inquire if there are any missing fees.
?Homebuyers might save several hundred dollars in some of these loan related costs-processing fees, underwriting fees, title company fees possibly,? Montgomery said. ?But they?re going to save more from (a lower) interest rate. One mortgage company might be charging 6 7/8% and another might be charging 7 ?%.? The difference between these two rates could amount to about 1 ?% of the loan balance, and on a $200,000 loan, the money differential might add up to $3,000. That $3,000 just might be rebated from the final lender to the mortgage company, which can either pocket the money as an additional income source or use it to pay some of the fees such as the processing fee or the underwriting fee for the homebuyer.
?Mortgage companies can make their loan product very attractive when they charge very little in the way of fees,? Montgomery said. ?But, then, they charge a higher interest rate. And they?re using a portion of that interest, perhaps, to pay some of these fees.?
?So, really, the borrower has to look at the entire matrix, has to look at the interest rate on the one hand,? Montgomery said. ?They have to look at all the costs on the other hand and see what the total package looks like.?
Dr. Oneida Cramer
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