Mortgage Loans

Chapter 16

The Elements Of A Loan

The costs of the various mortgage loans that are available to you will vary greatly according to which charges and fees are customary at the particular bank or finance company you use. Here are some of the most common, and some hints for eliminating or reducing them. Remember, though, that you want the lowest overall cost, so if a lender charges some of these fees while others don't, they may still have the best deal based on all the costs.

Loan Origination Fee

This is the basic fee for writing the loan. It may be a set amount at some banks, or a percentage of the loan (one percent is common). The best way to reduce or eliminate this fee is to find a lender that doesn't charge it, or charges less. Asking the bank you are at if there is any way to reduce it can't hurt either.

Loan Discount Fee

This is commonly referred to as "points." A point is one percent of the loan amount. You pay points to reduce the interest rate of the loan. Paying two points on a $160,000 loan, for example, means paying $3,200. For this you get a lower interest rate.

Points are basically prepaid interest. For that $3,200 in the above example to save you that much or more in interest, you will have to be paying those lower payments for a while. If you will be moving within the next four or five years, you are probably better off paying the higher interest rate.

How do you know whether you will pay more with or without the points? Ask the lender for help determining what your interest charges will be with or without this interest rate "buy down." If they can tell you at exactly what point the fee will equal the interest saved (say, payment number 46), even better, but they may not be willing to figure this for you. Beyond this, since it all depends on how long you will be in the home, you have to give it your best guess.

Appraisal Fee

Most lenders will require an appraisal, and the fee for this will be paid by you. It might be anywhere from $300 to $700, depending on the property and the area of the country you are in. If the appraisal doesn't show that the home is worth close to what you are paying, you may not be able to get the loan. Ask the lender if you still have to pay the fee if you don't get the loan.

Not all lenders require an appraisal. I bought my first home without an appraisal, because I was putting 25% down, and the tax assessors estimate of value was considered good enough for this particular bank. There were two reasons I was able to save the $350 appraisal fee. First, because I asked if we could skip the appraisal. Second, because the bank was holding its own loans, so they could waive any requirements if they wanted to.

Most banks no longer have many "in house" loans. They are essentially loan brokers now, selling all their loans into the secondary market. This means they have to meet the requirements of these buyers, so they are limited in what they can do. It can't hurt to ask, though.

One other way to save the appraisal fee is to see if a recent appraisal has been done on the property. If so, and if it was done by an appraiser that is on the banks approved list (ask), they might accept that appraisal. There could be some fee for reissuing or updating the appraisal, but this should be much less than a new one.

Credit Report

Some lenders will charge you for pulling up your credit report, and some won't. You have to ask. If you are getting preapproved, they might accept a credit report that you got for free on the internet. Although this is a "consumer" report, it has essentially the same information that the bank would get on its own. Ask if this is enough.

If you aren't sure about how your credit will effect your ability to borrow, go to a lender that will pull a report and preapprove you for free. This way you'll know how much you can borrow, and at roughly what interest rate. Then, if you find a lender with better rates on their mortgage loans, you'll know whether it's worth paying for them to run a credit check.

This chapter continues here: More About Loans