When you borrow a mortgage, charges just seem to keep piling up on you. One fee you will definitely pay if you go through a mortgage broker is the mortgage broker fees. What buyers may not be aware of is that you most frequently have an option: you can pay the fee at closing or you can add it to your mortgage loan.
Both options have pros and cons. Your ideal choice depends on your budget, long-term objectives, and the level of flexibility you want. Let's dissect them so you can make an informed decision.
What are Broker Fees?
Broker fees are what you're paying for the broker's service to help you shop for a loan, compare lenders, and process paperwork. Most brokers will charge you 1% to 2% of the loan. The fee compensates them for their experience, time, and negotiating skills to get the best possible rate.
Advance Payment of Broker Fees: Advantages
1. Reducing Monthly Payments
When you pay the broker fee at closing in advance, your loan balance is reduced. That equates to smaller payments each month over the term of the loan.
2. Accumulate Interest Over Time
By not including the fee in your loan, you are not required to pay interest on it. Even a couple thousand dollars added onto your mortgage accumulates to considerably more over 30 or 15 years.
3. Cleaner Financial Picture
Other borrowers prefer the ease of having their mortgage balance simply equated to the house value without other forms of fees added.
Advance Payment of Broker Fees: Disadvantages
1. Increased Out-of-Pocket Settlement Costs
Closing day is already expensive. Paying the mortgage broker fees upfront is an extra cost on top of an already expensive fee. If you are in a tight financial situation, this will not be the most helpful option.
2. Lower Cash Flexibility
Spending your savings on fees means you have less room for maneuver for home maintenance, emergencies, or moving expenses.
Rolling Brokerage Charges into Your Loan: Advantages
1. Lower Initial Costs
Rolling the broker fee into your loan keeps you from having to bring so much money to the closing. For most buyers, this allows you to become a homeowner sooner.
2. Keep Emergency Savings
Having money at home to spend on surprise home repairs or personal emergencies is worth the additional interest paid in the long run.
3. Smooths Out Budgeting
Instead of a huge down payment, the fee is built into your monthly mortgage payment.
Rolling Broker Commissions into Your Loan: Disadvantages
1. Increased Loan Balance
The worst part is that your overall amount borrowed is higher. That is, your monthly payments are slightly higher.
2. You'll be Charged Interest on the Fee
You will be paying interest on the broker fee for the term of the loan. In the long run, this can cost more than paying the fee upfront.
3. Can Influence Loan Approval
Borrowing more money can potentially affect your debt-to-income ratio, which lenders use to determine approval for loans.
Wrapping it Up
Whether to pay the broker fees cash or to pay them as an add-on as part of the mortgage is just a matter of what works for you. If you can make it work and you prefer lower long-term expenditures, rolling the mortgage broker fees up front is probably what you should do. If you're trying to save your dollars for other applications, paying through the loan will be a useful consideration.
The secret is to understand the trade-offs. Having a wise mortgage broker to guide you through the process can help you reconcile your options and make a decision that fits both your budget and your homeownership goals.