In the first installment of this series we looked at some of the things to look out for when shopping for your mortgage. Here are some more things to be aware of:

Hidden Fees – As I said before, most lenders are borrowing money from the same sources and their cost of business is similar. So if one company’s rates are unnaturally low, it mans they are making up the money in other ways. There is a relationship between the rate that is quoted, and the amount of fees that are charged. The lower the rate is, the more money you will have to pay to get it.

It costs a certain amount of money to process and fund a mortgage. Mortgage companies are in business to make a profit, so they know that they need to bring in enough income to pay all their expenses and earn a reasonable profit. There are two ways to do this. First through the rates – the investors, mostly big banks and financial companies, pay lenders for bringing them loans (this is called a yield service premium. I’ll go into this more in a later post.) The second way is through fees that are charged to you, the borrower. Either way is fine, as long as you know exactly what you are getting. Where it gets tricky is when the lender hides fees in order to make the rate seem better than it is.

There are a number of fees that are normally paid as part of getting a mortgage (I’ll go into more on this in another post). But sometimes the fees can get excessive. In many parts of the country origination fees are standard. Here in the Chicago area it is more common not to charge an origination fee. Rates should be lower if the mortgage company is charging an origination fee. Look for things like discount point, warehouse fees, document preparation, administrative fees and the like. Ask what each of the fees goes for and if the fee is negotiable. I’ve seen lender charges of several thousand dollars plus the origination fees. At my company, Professional Mortgage Partners, the normal bank fees are under $1,000. Again, there’s always a trade off between rates and fees. But if you are paying thousands of dollars in fees up-front, it will take you years before you’ve broken even by getting the lower rate.

Pre Payment penalties: Another thing to watch out for is a pre-payment penalty. This is when the mortgage contains a clause that states that you will have to pay an extra penalty if you get out of the mortgage within a certain period of time, either through selling the home or refinancing. Some mortgages have pre-payment penalties built in, but many more conventional loans offer the penalties as an option - that is, you can get a lower rate if you agree to take a pre-payment penalty. If you know that you won’t be moving, and you’re convinced that rates won’t drop and give you an opportunity to refinance at a lower rate, this can be a fine decision. Where it becomes a problem is when you are quoted with a built-in pre-payment penalty in order to show the lower rate, but the terms are not disclosed to you. This can cut off your options, and cost you thousands of dollars in the long run if you need to get out of the mortgage earlier or can’t refinance because you are locked into a higher rate mortgage.

In the next installment of this series I will show you what you can do to protect yourself when shopping for a loan.

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