Consumers and businesses can line up hundreds of thousands of dollars to purchase real estate, through mortgage financing. Because of the amount of money on the line, lenders will charge fees to provide services that protect their financial interests, turn profits, and manage risks. Before mortgage approval, the bank must verify that applicants are acceptable credit risks while also appraising the value of real estate collateral. No-fee mortgages may accommodate consumers who wish to avoid paying fees.
Federal Reserve Board literature indicates that closing costs may add up to 3 percent of your approved mortgage loan principal. The bank will use a portion of the closing costs to order an appraisal and inspection of your home, and verify property value. The bank is concerned with property value because creditors maintain rights to foreclose upon the home and sell it off in the event of borrower default. The bank will also apply closing costs to application fees, loan processing and title insurance. These services research borrower ability to make timely mortgage payments and verify his future ownership of the home.
Lenders may charge pre-payment fees to discourage creditors from paying off the mortgage before its maturity date, which may come in 15 or 30 years. The bank stands to lose tens, if not hundreds of thousands, of dollars in interest payments when borrowers pay the home loan off early with regular cash flow or through mortgage refinancing. Lenders are required by law to disclose the presence of any pre-payment fees within all mortgage contracts. One particular contractual agreement may charge a borrower six months worth additional interest payments in pre-payment fees, if he were to pay off the mortgage within the first three months of entering the contract.
Regular monthly mortgage payments are divided into one principal and interest payment alongside one escrow account deposit. The bank often pays property taxes alongside private mortgage (PMI) and homeowner’s insurance (PMI) premiums on the borrower’s behalf. PMI further protects the bank against financial losses. The private mortgage insurance company will pay out a cash settlement to the lender, in the event of any mortgage default. A borrower can expect to pay $100 in monthly private mortgage insurance premiums for every $150,000 of mortgage principal borrowed. Borrowers will not be responsible for taking out PMI and can avoid premium costs after committing to making significant down payments. Private mortgage insurance generally falls off the table after borrowers pay off 20% of mortgage principal.
A borrower may opt to take out a no-fee mortgage in order to bypass closing costs, pre-payment fees and private mortgage insurance premiums. The no-fee mortgage, however, is likely to charge a relatively high interest rate so that the bank can make up for lost up-front revenue over time. Before deciding to take out a no-fee mortgage, prospective borrowers can pull up online mortgage calculators and toggle through projections. For the no-fee mortgage to make economic sense, the immediate up-front savings should exceed the increase costs of higher long-term interest payments. The no-fee mortgage would be more so ideal if the borrower plans to own his home for less than five years and also puts down less than 20 percent.