Atlanta Mortgage Broker DiscussesWhy and How the Length of Mortgage Can Cost Can Cost the Borrower Money
Why and How the Length of Mortgage Can Cost Can Cost the Borrower Money. Real estate financing is one of the most imposing limitations of homeownership in many parts all over the world. Mortgage affordability determines not only the ease of acquiring a loan but also the cost of holding the loan up to the loan’s maturity date when the borrower is expected to have repaid 100% of the loan funds borrowed. This article demonstrates that the length of the mortgage can cost the borrower more or less depending on the nature of the cost.
Many borrowers understand that long repayment duration will expose them to an extended duration of fluctuating interest rates for those mortgages issued on floating interest costs. Unpredictable interest rates affect a borrower’s capability to repay a mortgage in that if interest rates on an outstanding mortgage rise, the cost holding of the mortgage also goes up. The ideal scenario for a mortgage holder is to be able to retire a loan at the least cost possible.
Interest on loans is a measure of the credit risk for a mortgage holder. For this reason, risky borrowing is supported by high-interest rates on the loans; the more the risk to lend in a borrower, the higher the interest rate on the loan. It is on this premise that the borrower’s credit rating/ credit score becomes of great importance to the lender and a poor credit score will make a mortgage loan more expensive to the holder in the long run. We discuss Your Credit Score and Your Mortgage in more detail on that post.
So, what are the common costs that a borrower will have to pay between the mortgage origination date and the mortgage maturity date? The naming of the various loan fees and loan charges may differ from one lender to another but the borrower needs to understand the rationale behind the charge/fee on the mortgage. They may include:
Loan Arrangement Fee
This is an administrative cost charged by a lender to the borrower because the lender has arranged for the loan and is often non-refundable. Lenders have to reserve large amounts of cash to be able to set up a credit facility capable of issuing both fixed-rate and variable-rate mortgages. Noteworthy, not all lenders charge a loan arrangement fee.
Depending on the perceived risk of the mortgage holder, lenders typically charge a loan arrangement fee of between 0 -3 percent of the loan amount.
This cost may be charged at the onset – at the loan application process when the borrower is submitting documents for loan consideration and origination or may be charged periodically as part of the annual interest cost. In the latter situation, the borrower will pay more in interest cost. It is paramount the loan arrangement fee is fully disclosed before the borrower commits to a loan contract.
Loan Booking Fee
Many lenders combine loan booking fees with loan arrangement fees and charge them together as a single cost. Similarly to the loan arrangement fee, the loan booking fee is often paid for when the borrower makes an application for a mortgage loan, is non-refundable, and is determined by the size of the mortgage loan.
Property Valuation Fees
This is a fee paid to a property valuer/appraiser whose professional role is to ascertain the value of the property and help determine how much of a mortgage loan the property can secure for the borrower. The amount of mortgage funds given by the lender will be proportional to the value of the property as returned by the appraiser.
The lender does not want to advance more money to the borrower beyond the value of the property used as mortgage collateral. The valuation cost to be paid to the property valuer is often dependent on the value of the property.
Charging Fee
These are the costs paid to the government entity/solicitor that registers the lender’s charge or the lender’s interest in the ownership and control of the property. When registering a property charge, the lender wants to have legal control of the sale and management of the property after the mortgage loan has been advanced to the borrower. The cost of registering this interest is borne by the borrower and is part of overall mortgage costs.
Mortgage Account Fees
To access a mortgage loan, the borrower must open an account with a mortgage lender. The mortgage account must be periodically updated and maintained for secure and accurate data recording. The cost of setting up, maintaining, and closing a mortgage account also adds to the overall mortgage cost. This fee to close a mortgage account applies even in the event of early loan repayment by the mortgage holder.
Loan Non-Performance Penalties
In most cases, there are charges to be made in form of penalties when a borrower falls late for loan repayment obligations. These fees are may vary between lenders but must be disclosed to the borrower early enough before signing the loan contract.
Mortgage Brokerage Fee
A Atlanta mortgage broker brings a potential borrower and the mortgage lender together for the mortgage business to take place. A mortgage broker is a critical source of professional advice to the borrower. Mortgage brokerage fees are due when the borrower opts to hire a mortgage broker to guide the borrower to get mortgage financing at a favorable rate.
Higher Credit Charges
Not all mortgage providers charge this cost. Additionally, this cost is mostly charged on borrowers with little mortgage down payment. A higher down payment (proportionate to the mortgage loan amount) will reduce the overall credit risk of the borrower. In the opposite scenario, when the mortgage down payment is low, the lender might charge extra to compensate for the extra risk.
The fee to Arrange Property Insurance Covers
The lender will seek to hold an insured property as a security for the mortgage loan. A property with an assurance cover ensures the lender is paid in the event the property is affected by the hazard against which the property has been insured.
A fire insurance cover will have the lender repaid if the building is razed down by fire before the loan has been retired. The cost of organizing for property insurance is a cost borne by the mortgage borrower. This fee will vary between lenders and between insurance companies.
Pre-payment Penalties/Fees
This fee is not common among all mortgage providers and the borrower is advised to analyse this cost on case-to-case analysis of available mortgage providers.
This fee is a form of a recompense made to a lender because the borrower has repaid the loan earlier than planned. Naturally, the pre-payment of a loan has the undesired and invariable effect of forcing the lender to make adjustments for the anticipated loan payments. This fee may range between 1-5% of the value of the early repayment.
Mortgage Closure Fee
This fee is dependent on the occurrence of the mortgage account fee as discussed above. If the borrower has already paid for the mortgage account fee, it is highly unlikely they will need to pay for the mortgage exit/closure fees. This fee is paid to mark the closure of the mortgage account and will often vary between mortgage providers.
The length of the mortgage can cost the borrower more or less depending on the length of the loan repayment duration.
For the borrower to access affordable mortgage financing, they should be alive to the nature and extent of mortgage costs that fall with the subsistence of the mortgage loans.