us help you understand Interest Rates, Points, Costs & Fees so that you can
make informed loan decisions.
Credit Report: Typically, it
costs under $50 to check your credit. With
your permission the lender will order a review of your outstanding loans and
your repayment history from a third party credit agency.
Application / Processing Fee: This cost, typically a few hundred dollars, is
charged to cover the lender’s work to evaluate your ability to repay the loan. Some lenders will credit this back to you upon
What is APR? The APR, or
annual percentage rate, is the sum total of all your borrowing costs expressed
as a percentage interest rate charged on the loan balance. For example, after fees, the original
interest rate quote of 5.875% might work out to a 6% APR loan, where the
interest costs about $6,000 per year for every $100,000 borrowed, and the
principal payments are calculated based on the length of the loan term (for
example 15, 20, or 30 years).
The interest rates on variable loans
readjust periodically based on changes in an index. Typical indexes include the Federal Funds Rate,
When mortgage companies are competing by
offering lower interest rates, they may charge you a one-time pre-paid interest
payment calculated as a percentage of the loan. Called “points”, this may range from 0.25% to
2% of the loan balance, and is usually paid up front. Points are tax-deductible; so consult with
your tax advisor.
Private Mortgage Insurance
(PMI): Also known as
Lenders Mortgage Insurance (LMI) is insurance payable to a lender that may be
required when taking out a mortgage loan.
It is insurance to protect the mortgagee in the event a mortgagor is not
able to repay the loan, and the lender is not able to recover its costs after
foreclosing the loan and selling the mortgaged property. The annual cost of PMI varies between 0.19%
and 0.9% of the total loan value, depending on the loan term, loan type and
proportion of the total home value that is financed.
The LMI may be payable up front, or it may be capitalized onto the loan. This type of insurance is usually only required if the down payment is less than 20% of the sales price or appraised value (in other words, if the loan-to-value ratio (LTV) is 80% or more).
If a borrower has less than the 20% down payment needed to avoid a mortgage insurance requirement, they might be able to make use of a second mortgage (sometimes referred to as a "piggy-back loan") to make up the difference. Two popular versions of this lending technique are the so-called 80/10/10 and 80/15/5 arrangements. Both involve obtaining a primary mortgage for 80% LTV. An 80/10/10 program uses a 10% LTV second mortgage with a 10% downcpayment, and an 80/15/5 program uses a 15% LTV second mortgage with a 5% down payment. Other combinations of second mortgage and down payment amounts might also be available. One advantage of using these arrangements is that under United States tax law, mortgage interest payments may be deductible on the borrower's income taxes, whereas mortgage insurance premiums were not until 2007.
Appraisal Cost: Lenders hire
experienced, often independent appraisers to evaluate the property’s purchase
price, condition and size compared to similar recent property sales. This helps ensure the purchase price is not
too high, and gives the lender more confidence in getting repaid in the event
they are forced to sell the property if the borrower defaults. The appraisal costs vary depending on the property,
type of appraisal, and region.
Miscellaneous Fees: Expect to see various charges incurred in the
processing of your loan which might include notary, courier, and county
Prepayment Penalties: These vary widely, so be sure you know in
advance if your lender will charge a penalty if you refinance or sell, and the
certain period during which the penalties apply.