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Understanding the “language” of mortgage closings can often save you hundreds of dollars and make the mortgage necessity a much more pleasant and stress free experience. Many closing costs are mandated by local, state, or federal government, while others are required by most U.S. mortgage lenders. Others, however, are, to be kind, “optional” and intended to lighten your wallet while increasing the income of your mortgage originator and/or lender. The largest of the optional fees normally are the origination and junk fees.
Origination fees represent the cost you pay to the mortgage broker, company or bank that “originated” (the company who found you or that you found on your own) your mortgage. Part of this fee is paid to the person(s) who worked on your loan from application to the completed file. The remainder goes to the company to pay their “back office” personnel (the paper movers), overhead, and profit. These fees usually amount to one to two per cent of your mortgage amount, so they can be significant. Origination fees can also be called “points”, which is a rather non-threatening name for the same amount.
Loan discount fees technically are the cost to you of receiving a lower interest rate, often called “buying down” the mortgage. The payment of an additional one per cent (another point) should buy down your interest rate between one-eighth (1/8%) and three-eighths (3/8%) per cent over the life of the loan. However, be aware that, on occasion, mortgage companies may use this category to increase their origination income, disclosing a one to two point origination fee in the designated area, and then adding another one to two point fee in the loan discount area. Should you see an amount and percentage in this category, ask what it means and how it translates to your interest rate. Don't let this inquiry go until you are satisfied with the answer.
Broker fees may appear in addition to one or both of the above, and then you might have a problem. Be prepared to switch to another mortgage source or to fight to get one or two of these categories eliminated. A broker fee, in this case, would only be another attempt to increase income and totally inappropriate if it is in addition to the above fees.
Junk fees represent a category of closing costs that are appropriately named. Another, more blatant attempt to increase income, junk fees are relatively new to the closing cost arena. When you see items such as “underwriting fee”, “processing fee”, “document preparation fee”, “administrative fee”, “warehouse fee”, “wire transfer fee” or “funding fee”, you are in the presence of the hated junk fees. Beyond an annoyance, they can amount to significant dollars, as these items can range from $50.00 to $500.00 each. A word of caution: Before you immediately blame your origination person, be aware that he/she may have no choice in adding these fees to your cost to close this loan. If he/she is a mortgage broker, these fees may come directly from the mortgage lender, and your originator may dislike them as much as you do. But, you should know, that prior to about ten years ago, the company(s) involved in giving you your mortgage loan had to make do with their origination (or broker) fees to cover all of their expenses and generate a profit, too.
In your favor: Most of these fees are negotiable if you show your knowledge and willingness to stand firm in your intention to reduce these items. You will be most happy you did as you might save hundreds of dollars through negotiation.
|Jennifer Mathes, Ph.D.|