05 NovTo Fee or Not to Fee?

Regardless of how a mortgage lender structures a mortgage for you, there will always be a cost that you will pay to obtain a mortgage.  The cost may be through up front fees, such as an application fee, or sometimes itemized fees charged at the time of closing.  Sometimes, there may even be a way for the lender to charge you no fees whatsoever.  So how does a lender do this?  The lender is able to increase the interest rate to cover the costs of your mortgage for you.  Instead of paying just once at the time of closing, you would pay over the life of the loan through a higher rate.

On the post about How Lenders are Paid, I showed you a rate sheet the lender looks at when deciding what rate to quote.  Well, the rate not only impacts the amount of income the lender earns but also allows the lender to provide you a credit to pay for your closing costs.  To determine whether or not it makes sense to cover the costs in the mortgage, you should consider how long you anticipate living in the home you are purchasing.  Here is how I calculate whether this makes sense for my customers:

1. Determine the market (par) rate, or the rate in which the lender would typically charge you.
   • For example, 6.5%
2. Determine the amount of fees you want to cover in through increasing the rate.
   • For example, $2,000
3. Calculate the fees as a percentage of the mortgage loan amount.
   • Consider a mortgage amount of $200,000 so the percentage would be 1%
4. Increase the price (not the rate) associated with the rate by the percentage of fees you want to cover.
   • This might increase the rate to 7% and would vary day to day and lender to lender, so this is just an example for explanation purposes.
5. Determine the payment difference between the rates.
   • Payment @ 6.5% = $1264.14 and the payment @ 7% is $1330.60 so a difference of $66.46
6. Determine the break even point by dividing your savings at the time of closing by the cost each month.
   • $2000 savings at closing divided by $66.46 = 30 or 30 months
7. So, if you plan to keep your mortgage for 30 months or greater it will not make sense to increase your rate, but if you will be there a shorter amount of time it would.

Now you know how to calculate whether to fee or not to fee.

Scott

About the Author | Scott & Marla Wynn

Scott & Marla Wynn are mortgage lenders with a focus on education. We believe an educated customer is our best customer. The mortgage industry has complicated the process of obtaining a mortgage so much that most customers believe the best way to select a mortgage lender is to inquire about rates and fees. Although rates and fees are an important part of the mortgage process, there are much more important areas to be concerned with. Lending A Hand was created to pass along our experience, knowledge and research to YOU to allow you to become a more educated mortgage customer. If you are planning a home purchase or refinance and live in the state of Colorado, we hope you select the Wynn Team as your mortgage lender!