Like most things in life, getting a real estate loan is not free. The old saying, “You get what you pay for”, certainly applies to your home loan. I’m sure some of you have seen commercials that advertise extremely low flat fees or maybe even some that charge nothing at all for you to get a loan. Don’t be fooled by these gimmicks. If something is too good to be true, it usually is. In this article I want to discuss some of the more common fees in acquiring your Real Estate loan and how they affect your actual interest rate. In certain situations paying more fees can work towards your benefit, which will save you the most money?

First let’s quickly go over some fees that most borrowers end up paying. In order to refinance or purchase your home you will almost always need an appraisal. Appraisal costs usually run between $250 to $500 depending on the property type and type of appraisal required. The appraisal is what insures the investor (the bank purchasing your loan) of the value of your home. Most investors don’t like to lend more money than a property is actually worth.

Another common fee is a processing or underwriting fee. This is to cover the large amount of labor and paper work done behind the scenes in order to get your loan approved and funded. I have seen processing fees range from $450 to as high as $1,000. Some banks and brokers are flexible on this fee. However, usually the good loan officers know they are worth the money and stick to their fees.

Everyone has to pay title and escrow fees. Title and escrow is usually independent from the bank or broker, but some banks do have in house title and escrow. These fees insure the title on the property is clear and that all notes are properly recorded. (To fully discuss all the services of title and escrow would demand an entire article.). Title and escrow also act as the notary when it comes to signing your loan docs. On purchase transactions the fees are split between buyer and seller; on a refinance the borrower pays for all of them. Title and escrow fees are based upon the purchase price and loan amount. The larger the purchase or refinance amount the higher your fees are going to be. In a recent refinance transaction for one of my clients, they paid roughly $1,000 in title and escrow fees for a loan amount of $175,000.

Now that we have covered the fees that you will likely pay, let’s discuss the one fee that you make a decision as to pay or not. Should you as the borrower pay a point (origination fee) in acquiring your loan? This is probably one of the most common questions I get asked as a loan officer. My answer is completely dependant on the borrower’s situation. A point means one percent of the loan amount, so if you are planning on paying a point on a $200,000 loan the point will cost you $2,000. Most people pay a point because it gets them a lower interest rate. It does not always make sense for a borrower to pay a point. However, about 80% percent of my clients end up paying a point. Let me explain to you what I mean.

The borrower looking to get a 30 year fixed mortgage will generally save themselves money by paying a point. In the example below we have two different borrowers, Frank and Judy getting a 30 year fixed loan for $200,000. Frank is going to pay a point and get an interest rate of 5.625% and Judy is not going to pay a point and take the higher interest rate of 6.00%. Even though Frank paid an extra $2,000 up front he is saving himself roughly $48 a month. Over the course of a 30 year mortgage that $48 a month adds up to a savings of $17,280, minus the $2,000. In this situation I would recommend the borrower to pay a point and save $15,000 over the course of their loan.

Frank:

30 year fixed at 5.625%

$200,000 loan amount

Monthly payment of $1,151.31

One point at $2,000

Frank saves over $15,000, by paying a point!

Judy:

30 year fixed at 6.00%

$200,000 loan amount

Monthly payment of $1,199.10

No points at $0

A lot of borrowers today are choosing different loan programs other than the 30 year fixed mortgage. One program that I see becoming more and more common is 3 Year ARM (Adjustable Rate Mortgage for the borrower that knows they are only going to be in there home for 3 years at the longest before moving or selling. In this situation I usually recommend the borrower not to pay a point and have a slightly higher interest rate. Using Frank and Judy again with a 3 Year ARM. Again Frank decides to pay a point and get an interest rate of 4.625% and Judy avoids the point and gets an interest rate of 5.00%. This time Frank pays the point and saves himself roughly $45 a month. Over the course of the three years he will only save $1,620, if he holds on to the loan for the whole three years. Judy this time makes the wiser decision and saves herself $380 by not paying a point.

Frank:

3 Year ARM at 4.625%

$200,000 loan amount

Monthly payment of $1,028.28

One point at $2,000

Judy:

3 Year ARM at 5.00%

$200,000 loan amount

Monthly Payment of $1073.64

No points at $0

Judy saves $380 by not paying a point!

There can be many other factors that determine whether to pay a point or not, the biggest usually being tax benefits. Again this is why it is important that you choose a loan officer who is willing to consider your entire financial situation. Your loan officer is going to make the same amount of money regardless if you pay a point or not, and adjusts your interest rate accordingly. Make sure these options are presented to you and explained in detail by your loan officer, before you choose a certain option.

Next month I will be dedicating the entire article to the subject of Interest Only. The idea of interest only scares a lot of people away, but I will make an argument that might convince some of you to consider this option during your next real estate finance transaction. You should know what is in your best financial interest.