Costs and fees explained...
How much are you paying for your mortgage?
What are reasonable closing costs?
What goes into pricing a mortgage?
Explain escrow
What are points and should I consider them?
What are prepaids?
There are several costs and fees associated with every mortgage. Here are some simple explanations of many of the costs and fees you will encounter. You can pay these in various ways as explained below.
Lender fees: (NOT Optional)
Our lenders fees are among the lowest and range from $781.00 to $950.00 depending on the lender we use to get you the best mortgage for your situation.
These fees usually include:A processing fee, application fee (for the appraisal & credit report), courier and preparation fees.Lender fees are dependent on the lender* (bank) and the state in which the property is located and are usually fixed and can be guaranteed. Lender fees are not optional, every mortgage loan has lender fees that must be paid by the borrower.
* Please note: This can be confusing. The term lender is often used to describe two different entities. The term lender can refer to the (broker) mortgage company that you buy your loan through or the bank that the financing is coming from. .
Title fees: (NOT Optional)
We have less control on the title fees because: Title Fees are dependent on the title company used. On a purchase, the seller determines the title company, and title charges will differ depending on the state. Therefore we cannot guarantee the title charges.
AKA Title Charges: These fees usually include:Title insurance policy, title processing fees and title recording fees.Title fees are dependent on the title company being used. The choice of title company's is up to the seller. Because we (the loan originators) do not know the company being used or their fees, we cannot guarantee the title costs. Title fees are not optional, every mortgage loan has Title fees that must be paid.
Points: (Points ARE Optional) Points are also known as origination fees or discount fees. Points are paid by you to ultimately reduce your interest rate. One point equals one percent of your total loan amount. Two points equal two percent, etc. On a $100,000 loan, 1 point = $1,000 and 2 points = $2,000.
Why would you pay points? To lower your interest rate. It makes more sense to pay points when you plan to have the loan for a longer than shorter period of time. Is paying points worth it? Find out by dividing the monthly savings into the cost of reducing the payments (the points) and you will see how long it takes to break even. I will be more than happy to run the numbers for you on this.
Origination fee: (Optional) This fee is technically to pay for the cost of making the loan to you. This is optional for you. If you pay an origination fee, even though it is applied toward the cost of doing the loan, it should result in a lower fee. Many lenders automatically include an origination fee in their quotes to keep the interest rate low and competitive. Origination fees are NOT tax deductible.
Loan discount fee: (Optional) This fee is specifically used to lower your interest rate. It is also optional. Discount fees ARE tax deductible.
Prepaid's: (NOT optional) Pre-paid's are amounts needed to settle your mortgage. Prepaid's consist of interest and usually taxes and insurance (unless you waive escrow).
Basically you are paying the interest to your lender (per diem = per day) for the remainder of the days of the month you are closing in. This is offset because your first full regular monthly mortgage payment will be due on the second full month after your closing. This means if you close in the middle of April, you will have to pay for the second half of April at the closing, and your first mortgage payment will be due on June 1st. You don't make a payment on May 1st. This is because you make your mortgage payments in arrears, that is, after the month is over. This prepaid amount is required by the lender.
You may also be required to deposit money into an escrow account at your closing (set up by the lender) to hold reserves to pay the taxes and insurance that the new lender will pay in the future. You may have to come up with several months of taxes depending on which month you close in and when the taxes are due. If you choose not to escrow (providing you qualify to do so) you will not need to prepay this.
How can these costs, fees and prepaid's be paid?
This is your choice. You can roll the costs, fees and prepaid's into your loan or pay them outright. If you roll them into the loan this will increase your loan amount and you will be paying interest on them for the term of the loan. Please note that this increase in the loan amount could change your LTV, among other things and could have a negative effect on your loan pricing. If you choose to pay outright, you will need to bring a certified check to the closing to cover the amount. You can also choose to have some of the costs rolled into the loan and pay others outright.
How are loans priced?
Lenders pay the brokers a small percentage of the loan (based on the interest rate) for putting it together and selling it to the you, the borrower. This is called the Yield Spread Premium (YSP) and again, does not come from you, it comes from the lender. Certain factors, based on your particular circumstances, can reduce the YSP. These reductions (adjustments) can be due to situations like the owner will not live in the property, the borrower decides to waive escrow, having a high LTV on a cash out Refi, or several other reasons. This will affect the interest rate.
The YSP from the lender combined with the point(s) you pay (if you choose to pay them) are what the broker/LO receives as their compensation. This is how we get paid. As you can see from this explanation if you pay points, or the more in points you pay, the lower the YSP can be therefore reducing your interest rate.
This is why when you compare rates quoted from different lenders, you must compare apples to apples, the same situation and on the same day. In other words your circumstances must be equal for each quote you are comparing.
A simple way to compare quotes is to compare the APR. This is the interest rate annualized with all the costs and fees included. Anyone giving you a quote should be able to give you the APR.
And of course you can compare the lender fees by just asking how much they are. You will find that the lender fees at ABI Mortgage are among the lowest, if not the lowest. We are committed to offering the lowest costs and fees. Please check out our low costs before you make any decision.
Escrow:
What does it mean? How does it work? How and why it affects loan pricing?
Escrow is the process of having your lender or bank (through their servicing dept.) pay your property taxes or insurance. They add an amount into your monthly mortgage payment that allows them to build up enough (reserves) money to pay your taxes & insurance when the bills are due. They hold this reserve in an account called an escrow account. Technically this is your money that the bank is just holding to pay the bills. When you finish paying off your mortgage, the bank will return any money held in your escrow account back to you. If you refinance, the bank will also refund the money back to you. However, in a refi, your new lender will require approximately the same amount to be held in their escrow account so they can now pay the taxes and insurance.
Since your taxes and insurance change occasionally (and of course they usually increase) your lender will need more from you monthly to meet the need. So, they will raise your monthly mortgage payment. Remember, if you have a fixed rate mortgage, the increase is strictly for escrow and even though your mortgage payment increases this does not affect your P&I (principle and interest) payment.
PITI = Principle, Interest, Taxes & Insurance.
PI = Principle & Interest.
Do you always have to escrow your taxes & insurance?
NO! Not always. If your LTV (loan to value) of your loan is 80% or lower you have the option to "waive escrow". This means you are now responsible to pay your own taxes and insurance.
If your LTV is higher than 80% you are requied to escrow. However once your LTV drops (over time from payments and appreciation of your property) to 78% you can request to start paying your own taxes & insurance. In an FHA loan you will be required to escrow no matter what your LTV.
NOTE!!! Lenders are more comfortable knowing that they will pay your taxes, and feel less risk if they have this control. So, MOST LENDERS CHARGE MORE IF YOU DO NOT ESCROW. This charge comes in the form of a decrease to the yield spread (to the mortgage broker) therefore will increase the interest rate you will be quoted.
Some people like to have the bank pay their taxes because it's easier. Some like to pay their own taxes so they can hold on to the money longer and earn interest on it. Whatever your preference, you should know all of your options.
We will help you get the best loan at the lowest cost, with quick & easy closings.
We link to real estate mortgage loan consultants, licensed in the state of Illinois, specializing in low cost home loans, providing helpful information and honest answers to your mortgage questions.
© 2006 TheMortgageVendor, all rights reserved.
The Mortgage Vendor.com
Your source for the best Home Loan Consultants and more!
Our links to the best mortgage, real estate, insurance and financial advisors!
