Do You Understand Your Mortgage Fees?
In a recently released study, one third of homebuyers believed the law required that everyone pay the same fees. Most people don’t realize that the fees vary with the lender and most are negotiable.
Unfortunately, most first time homebuyers are ill-prepared for the biggest purchase of their lives. They tend to sign up with what they believe is the cheapest option without understanding how to truly compare mortgages and evaluate it for their situation.
We’re in homebuying season right now. Buyers focus on the price of the home rather on looking at the overall cost including the right mortgage.
What Is APR?
Whether you’re getting a home loan or an auto loan, most people don’t understand the difference between interest rate versus annual percentage rate. This is also why many people get in credit card trouble.
Three lenders with identical information may still calculate different APRs. The calculations can be quite complex and are poorly understood even by most financial professionals. Most users depend on software packages to calculate APR and are therefore dependent on the assumptions in that particular software package. While differences between software packages will not result in large variations, there are several acceptable methods of calculating APR, each of which returns a slightly different result.
APR is based on government rates, term of the loan, and any other additional fees associated with the loan.
There are at least three ways of computing effective annual percentage rate:
- by compounding the interest rate for each year, without considering fees;
- origination fees are added to the balance due, and the total amount is treated as the basis for computing compound interest;
- the origination fees are amortized as a short-term loan. This loan is due in the first payment(s), and the unpaid balance is amortized as a second long-term loan. The extra first payment(s) is dedicated to primarily paying origination fees and interest charges on that portion.
Interest Only Loans
Some loans have a set term where the borrower pays only interest. You can always pay more chiseling down the principal. These loans have a higher APR because the total interest paid of the time of the loan is higher than regular loans.
Because of the mortgage crisis, very few people can obtain an interest only loan, and they are usually only for jumbo mortgages.
From the New York Times:
Freddie Mac stopped backing the loans in 2010 after suffering big losses; as a result, fewer lenders offer them. Those that do have strict qualifying standards. Lenders generally require that the borrower have at least 30 percent equity in a property, and a minimum FICO score of 720. Determination of ability to pay back the loan is based on the fully amortized payment, not the interest-only payment.
Interest-only loans are primarily adjustable-rate products with an initial fixed period when only interest is due. Available in 5-, 7- or 10-year terms, they “are generally done for 10 years so there’s no payment shock in the near term,” said Tom Wind, the executive vice president for residential and consumer lending at EverBank, a national lender based in Jacksonville, Fla.
Interest rates are usually an eighth- to a half-percentage point higher than on fully amortized jumbo loans. After the fixed term is up, the mortgage re-amortizes, and both principal and interest are due.
In prior posts, we’ve discussed the various fees associated with mortgages including the application and escrow fees.
When you’re ready to buy your first home or refinance, work with a reputable loan officer who will take the time to explain the fees and assist you with comparing different loans to find the one that’s most affordable for you.