Mortgages and Fees

Your mortgage is likely to represent your largest financial commitment, as you may need to borrow hundreds of thousands of dollars to purchase a home. Meanwhile, the bank stands to collect several thousands of dollars worth of interest payments each year on the transaction. Because of the amount of money on the line, the bank will take special care to guard its bottom line against losses. As a consumer, you will be responsible for the closing costs, pre-payment fees, and private mortgage insurance that help the bank protect its own financial interests.

Mortgages and Fees: Closing Costs

According to the Federal Reserve Board, you will owe 3 percent of your mortgage principal in closing costs. These expenses help the bank to analyze your status as a credit risk and to place a value upon your real estate collateral, which secures the loan. The bank is concerned with property value because it carries rights to seize your home and auction it off -- to make good on missed payments. Mortgage closing costs therefore go toward a home inspection and property appraisal, alongside title insurance, legal services, and loan application fees.

Mortgages and Fees: Pre-payment Fees

After mortgage approval, pre-payment fees may be applicable to your account to discourage you from paying off the home loan before its term comes due. In most cases, you will pay off the mortgage early through refinancing. Refinancing describes a series of transactions where you take out a new loan and use its cash proceeds to pay off your existing mortgage. At that point, your old lender stands to lose tens of thousands of dollars worth of future interest payments.

By law, your lender is required to disclose the presence of any pre-payment fees within your mortgage contract. For example, you may owe 9 months worth of interest payments in pre-payment fees if you pay off the mortgage within the first two years of your contract.

Mortgages and Fees: Private Mortgage Insurance

You will generally pay private mortgage insurance (PMI) on a monthly basis -- through your mortgage escrow account. PMI costs vary according to municipality, but you can expect to pay roughly $50 in premiums for each $150,000 borrowed. Private mortgage insurance further protects your bank against losses, as it pays out a cash settlement to the financial institution in the event of mortgage default. To bypass private mortgage insurance, you must put down at least 20 percent of your home's original purchase price in cash at the negotiating table.

Mortgages and Fees, Sources:

Federal Reserve Board of San Francisco: Private Mortgage Insurance

Federal Reserve Board: A Consumer's Guide to Mortgage Settlement Costs

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