5 mortgage costs to watch out for

By SmartMoney

Faced with plunging property values and rising defaults, lenders are charging borrowers higher mortgage rates and adding fees. Not all of these added costs are set in stone, however. If you're looking for a loan, vigilant shopping and a little haggling can go a long way toward landing a better deal.

Here are five fees to watch out for and how to avoid paying them:

Application fees

Just because an ad says "no application fee" doesn't mean there's no fee at the time you submit a mortgage application, warns Holden Lewis, a senior reporter for Bankrate.com.

"Each lender gives different names to its fees, which makes it hard to comparison-shop," he says.

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Fees paid outside of closing -- meaning at the time you submit loan paperwork -- typically include an application fee (an average of $252, according to HSH Associates, a mortgage-information company in Pompton Plains, N.J.), an upfront property appraisal ($331) and a credit check ($33). They may be listed separately or lumped together as a "document-processing fee."

To avoid overpaying, ask lenders for a good-faith estimate of mortgage costs. Though lenders are under no obligation to provide one, most will, Lewis says.

The yield-spread premium

One dirty little secret of the mortgage industry is the yield-spread premium. In return for arranging loans with inflated interest rates, some brokers receive fattened payments -- referred to as the yield-spread premium -- from lenders, says Allen Fishbein, the director of housing and credit policy for the Consumer Federation of America, an advocacy group.

Even a slight difference in rate -- say, 6.779% instead of 6.495% -- amounts to nearly $17,000 in extra interest over the life of a 30-year, $250,000 loan. To avoid getting suckered, ask your broker whether the lender pays a flat rate or a percentage commission based on loan terms. Also, obtain a copy of your credit score and use Fair Isaac's MyFICO.com to get a realistic estimate for a fixed-rate mortgage based on your score.

Risk-adjusted rates

Getting deemed a risky borrower is no longer just a matter of a low credit score. Lenders now consider other risk factors. Buy in an area that has seen values drop precipitously -- such as Florida or Las Vegas -- and you can expect a higher rate, Fishbein says.

The good news is that each lender gives different weight to individual risk factors. So make sure to collect bids from various lenders.

Down-payment penalties

The days of zero down on a mortgage are over. Without a down payment of at least 20%, prospective homebuyers will undoubtedly get hit with a higher interest rate and need to pay for more points. (Each point usually amounts to a fee of about 1% of a mortgage.)

Also, if buyers can't put 20% down, they'll need to get private mortgage insurance, which typically costs 0.5% of the loan. Shopping around for lenders with more-favorable points and insurance charges can help lessen the blow.

Closing costs

"The way closing fees are disclosed is, frankly, quite bad," says Keith Gumbinger, a vice president at HSH Associates. That's problematic, considering closing fees amount to 2% to 5% of a home's price.

Location plays a big role, as taxes and other requirements vary by state. Some states require expensive attorneys to oversee the closing process, while others allow a title agent or escrow officer.

Ask potential lenders for a good-faith estimate of closing costs. Then check in weekly with whoever is handling the closing to see whether there are any changes in either lender or third-party fees. Here's how to keep these fees under control:

• Lender fees. Ask which expenses go into each fee, and challenge anything that seems unnecessary or inflated, such as overly high charges for faxing documents or overnight delivery. Be particularly cautious about fees prorated based on the closing date, Lewis says. Such fees are easily miscalculated, especially if the closing date changes.

• Third-party fees. Homebuyers also have to deal with title insurance companies, surveyors and inspectors, all of whom have their own fees, Fishbein says. Comparison-shop at other local companies to ensure you're getting a competitive bid. If you find a better rate, ask the lender to use that vendor instead.

This story was reported and written by By Kelli B. Grant for SmartMoney.

Published Oct. 2, 2008