Beware of 4 costly mortgage fees

By SmartMoney

Mortgage lenders may be offering loans at record low rates, but that doesn't mean the loans are coming cheap.

In fact, borrowers may see much of the savings they'd realize from lower rates wiped out by closing costs, fees that are on the rise as lenders seek to pad their bottom lines.

"Frankly, lenders are struggling to make mortgages on a profitable basis in order to ensure survival," says Keith Gumbinger, a vice president at mortgage information firm HSH Associates. "And you can, as a lender, help to increase your profitability by an increase in fees."

As homeowners rush to lock in those rock-bottom mortgage rates, lenders' costs of doing business increases, says Brian Smith, a senior loan officer at Republic Mortgage in Seattle. For example, whenever a lender locks in a rate for a prospective borrower, that action incurs administrative costs, even if the loan doesn't close. Should the borrower fail to get approved, change his or her mind or jump on a lower rate elsewhere, the lender is still on the hook for the costs.

"As these locks fall out, each loan gets more expensive for you (as a lender), so you pass on that cost," Smith says.

As a result, borrowers may encounter higher underwriting or administrative fees, along with bigger charges from appraisers, mortgage insurers and mortgage finance companies Fannie Mae and Freddie Mac.

When shopping for a mortgage, ask lenders to provide you with written good-faith estimates so you can compare costs, says Frank Ruzicka, a mortgage banker with Cornerstone Mortgage in St. Louis. Here are four fees to watch for:

1. Processing fees

Whether they're called administrative, application, underwriting or processing charges, these fees are on the rise as lenders compensate for the lower-rate loans that they offer to be competitive. A lender may offer a borrower a $140,000 loan at an attractive 4.875% and no points, for example, but slip in a $350 underwriting fee and a $350 processing fee in addition to its regular application fee, Ruzicka says.

While charging an application fee of several hundred dollars is normal, piling on several additional charges for the same amount of work is not. Be sure to compare several lenders' fees and question anything that seems redundant.

2. Fannie's and Freddie's cuts

On April 1, Fannie Mae and Freddie Mac yet again increased fees for loans they purchase or insure. Depending on a borrower's credit scores and the size of his or her loan relative to the home's value, these so-called loan-level price adjustments can range from 0.25% to 3% of the loan. Another 0.25% to 3% is added for cash-out refinancing (when borrowers refinance with loans that are bigger than what they owe on their existing loans so they can have some cash left over).

For someone in the credit score range of 660 to 679, a 30-year fixed-rate mortgage that is 85% of the home's value would incur 2.5% in fees. (Before April 1, that same loan would have cost 1.75%.) And if the borrower took out cash, another 2.5% would be added, for a total of 5%.

• Raise your credit score to 740

To figure out if you'll be hit with these charges, ask your lender or mortgage broker whether your loan will be sold to or insured by Fannie or Freddie. Today, that's the case for 56% of all outstanding mortgages.

Continued: Appraisal fees

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