What will your mortgage or refinance actually cost you? Many borrowers focus only on the interest rate, because that's the main thing that determines what you're going to pay. Unfortunately, they too often ignore a wide range of other factors that will affect what the overall cost of your mortgage will be.

What will your mortgage or refinance actually cost you? Many borrowers focus only on the interest rate, because that's the main thing that determines what you're going to pay. Unfortunately, they too often ignore a wide range of other factors that will affect what the overall cost of your mortgage will be.

First-time homebuyers in particular tend to overlook the importance of the fees and other costs associated with a mortgage. They don't realize how much they can add up until they see them on the Truth-in-Lending form or get the estimate of what their monthly mortgage payments will be.

In addition to the mortgage costs themselves, there are also secondary costs, such as for taxes and insurance, that are typically combined with the monthly mortgage payment, and which the borrower needs to plan on.

Costs Vary Widely by State

So what will your mortgage actually cost? The general rule of thumb is that you'll pay from 2 percent to 6 percent of your loan total in closing costs and other loan fees. The range is broad because charges and practices differ from state-to-state and lender to lender - the higher rates are more likely to be found in high-tax states.

What you'll pay will also vary depending on local practices regarding which fees are paid by the house seller and which are paid by the buyer. Though many of these are set by regional customs, they can also be negotiated as part of the sales agreement - so figuring your mortgage costs starts right there. The more fees that the seller agrees to cover, the lower the cost of your mortgage - and you're more likely to win such conditions in a market with a surplus of homes available, such as right now.

Typically, you'll need to pay an application fee, appraisal fee, title search and loan origination fee, plus an assortment of lesser fees to cover things like home inspections, filing legal documents and the like. Some lenders, however, may try to pad out their fees to bring in extra revenue, particularly if they're offering an unusually low rate to begin with, fees that can sometimes add up to hundreds or even thousands of additional dollars. This is one of the main reasons to shop around for a mortgage - so that you can not only compare interest rates, but fees as well. Remember, you're looking at an entire package.

New Fannie, Freddie fees

A couple of newer fees to be aware of are the new "loan price adjustments" charged by Fannie Mae and Freddie Mac, as of April 1, on loans they support for borrowers with less-than-perfect credit. The fees range from one-quarter to three percent of the loan value, depending on the borrower's credit rating, for the loan itself, and another quarter to three percent for mortgages with a cash-out refinance (the fees kick in for borrowers with credit scores below 740). Since the two lenders account for the vast majority of mortgages in this country, that could significantly add to the cost of a mortgage for many borrowers.

If you go through a broker, you may pay a yield spread premium. This is what you pay the broker for setting up the loan, in the form of a slightly higher interest rate, usually about a quarter of a percent or so. Since this can add up over the life of the mortgage, you may be better off trying to find a broker who will work for a flat fee up front, particularly if you plan on staying in the home a long time.

Another possibility is a flat fee mortgage. This is a loan where all the closing costs and related fees are rolled into one up-front fee. Bank of America started a flat fee program in April 2009 where you simply pay a fee of $2,000-$3,000 for originating a mortgage, depending on what state you're in. Other lenders may be willing to offer them as well if you make a point of inquiring. One of the advantages of a flat fee mortgage is that it takes the guesswork out of closing costs; it also gives you a simply way to comparison shop different mortgages.

No-cost mortgage rolls fees into interest rate

You can also try to obtain a no-cost mortgage. A no-cost mortgage is one where the closing costs and other fees are actually covered by charging a higher interest rate than the lender would do for a regular mortgage. They work like discount points in reverse. Suppose you paid $5,000 to get two discount points that lowered your interest rate by a quarter of a percent. For the same mortgage done as a no-cost, you'd pay a quarter of a percent higher interest to cover about $5,000 in closing costs. By finding out what a no-cost lender would charge for discount points on the same loan, you can figure out about what the equivalent in closing costs would be.

A no-cost mortgage can be a way of disguising the actual closing costs, so you want to be careful, but it can also be a good deal for consumers, particularly those who are not planning to stay in the home more than five or seven years, before the additional interest has had time to pile up. It also provides a convenient way to compare mortgage offers as well - since the costs are rolled into the mortgage, all you need to do is compare the rates, in this instance.

Published on September 30, 2009