Negotiating and signing a mortgage is an exhilarating activity, but also a stressful one. It’s usually the culmination of hours of paperwork and background checks, and the process can seem endless at times. While it’s exciting, you also want to keep your business brain working and make sure that you’re getting the exact deal that you agreed to before you put pen to paper.
Table of Contents - Mortgage Fees: How to Spot Junk Fees in Your Closing Costs
To that end, many closing documents can come with myriad fees listed. Some of these might be ones that you realize are necessary, but others can leave you scratching your head. While some people are just exhausted enough with the whole deal to sign whatever’s in front of them, the savvy property investor can save some money at this point. Knowing what’s a legitimate fee and what’s just an extra cost can be a great way to negotiate and save yourself a lot of money over the short and long term.
Different types of costs
First of all, it’s important to have a refresher on what closing costs are. It’s an umbrella term meant to cover the many expenses that come along with purchasing a piece of real estate, so they’re quite diverse – which can add to confusion among buyers, especially inexperienced ones.
Recurring costs are expenses that you pay upfront but will also continue to pay during the mortgage. These can include real estate taxes or homeowner’s insurance – numbers that you know will be due on a monthly or annual basis during the length of the loan. They usually need to be funded a certain amount in advance at closing and placed into escrow where they can be withdrawn over time to cover the costs they were earmarked for.
On the other hand, nonrecurring costs are one-time fees that you pay at closing. These can be points, which are fees you pay for more advantageous mortgage rates, a broker’s service fee, a home inspection fee or a series of loan fees like a credit report check, a tax service fee or a wire transfer fee. These will all vary in amount based on the type of property and the service that you use to secure the loan.
Junk fees usually fall into the latter category of nonrecurring costs. They have essentially itemized upfront lender charges that you are expected to pay to finish securing your loan. The fees listed above are not junk fees but are simply the cost of doing business. Junk fees tend to be extra costs of uncertain origin or reason
Types of junk fees
Junk fees come under many different names, but they all serve similar purposes. A loan origination fee, for example, is a notorious junk fee that a lender can use to make a loan rate seem more advantageous. By requiring you to come up with this additional money at closing, it’s basically a higher down payment, coming from you, in disguise. This might not be a bad thing in and of itself, but it’s important to know exactly what’s going on here.
An application fee is another one to watch out for – basically, it’s a charge for the privilege of you filling out the mortgage application form in the first place. An underwriting fee is another example of a service that you would expect to be included in the total package – a mortgage lender has to have underwriting done to secure a mortgage, so it doesn’t really make sense to have this be a separate itemized line.
Additionally, the terminology can be intentionally misleading at times. For example, an origination fee and a broker fee are the same things. If you see them both listed and you’re expected to pay for both, then it’s time to take a pause and ask your mortgage lender exactly what it is that you’re paying for.
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Avoiding junk fees
One of the difficult things about junk fees is that they’re typically introduced to the borrower so late in the process that you probably don’t have a lot of time or bargaining power with which to change things. Make sure that when you start a mortgage application that your lender provides you with a list of expected fees – they are legally obligated to do this in most cases.
One big bargaining chip that you have in your favour is that it’s virtually always in the lender’s best interest to proceed with any existing loan that’s in process. They want to close as badly, if not more so than you do, so don’t be afraid to be the squeaky wheel. A lot of lenders will remove fees or negotiate them if you simply have the will to ask. Most borrowers don’t take the time to do this, so they might be willing to shave off money here and there if it means moving the process along.
You can also help avoid excessive fees by shopping around, which is always a good idea anyway. Go to several different lenders and have them work up what your loan would look like, estimated closing costs and all. Even if you still intend to go with your original lender, this will give you a wealth of information about comparable costs. You can then back to your lender and ask to know why the going rate in your area for a fee is X, but they’re charging Y.
Junk fees are unfortunately a fact of life for many property investors, but you shouldn’t feel powerless to resist them. Before you enter into any loan agreement be sure to do your homework and know what to watch out for. Being familiar with the terminology makes you certain that you know exactly what you’re paying for and gives you the bargaining power to fight back and protect your wallet. Some lenders have taken to offering flat rate “all-in-one” fees that consolidate all of this into one big price tag. While this might seem tempting at first, realize that it’s probably not as good as it seems. Finally, you should always consult an attorney about any fees or documents that you need to have better explained.
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