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Recurring Mortgage Costs

Unfortunately, not all mortgage-related costs are dispensed with at closing. Some keep on giving.

This page:

  • Lists what recurring fees you are likely to encounter

  • Describes why lenders charge these fees

  • Explains how your choices can affect these costs

This page brings to a close our Mortgage Basics guide, in which we've discussed various mortgage types and the components that make up your mortgage package.

If you missed it, you can start at the beginning.

Recurring mortgage costs

This part of your mortgage package is comprised of fees paid continuously for part of or the whole of your mortgage's life. Sometimes your monthly payments may change (even if you have an FRM) because of these added costs. These fees include taxes and insurance, (often referred to as escrow or impound charges) and pre-payment penalties.

Escrow Fees
When you buy a new home, the lender automatically sets up an escrow account (also called an impound account) with a third party. You will probably pay a sum at closing (up to two months of escrow payments) into this account. Over the life of your mortgage, your lender will put a small part of your monthly mortgage payments into this account and will also pay taxes and insurance out of the account.

This arrangement allows the lender to make sure the home owner doesn't let the home insurance lapse or forget to pay real estate taxes. In case anything should happen to the house or the borrower defaults on the loan, the house is insured and up-to-date on taxes, so the lender's investment is protected.

The escrow account can cause the monthly payment on even a fixed rate mortgage to vary slightly. Depending on when your mortgage taxes and insurance are paid, the account may become low or overdrawn. The lender will cover the difference, but the next month's mortgage payment may be higher.

Prime lenders usually allow you to forego the escrow account. In these situation, you pay the insurance and taxes yourself for a slightly higher interest rate. Subprime lenders may not be as flexible, because the escrow account protects their investment and because subprime mortgages are riskier investments. If you have to pay private mortgage insurance, you will probably always need an escrow account.

Prepayment Penalties.
These include any fees charged for paying off your mortgage early or for making extra principal payments within a year. They can be very expensive to you if you want to sell your house or simply pay off your mortgage early. Prepayment penalties can and should always be avoided if you're a prime borrower.

Sidebar
Our recommended prime lender Eloan does not charge pre-payment penalties on any mortgage package. Just one more reason to have a look...

If you need a sub prime mortgage, you may have to accept some prepayment penalties. Try to get them waived (even if it means a small fee at closing) or at least limited to the first couple of years.

FullSpectrum Lending, our recommended sub prime lender is very flexible with pre-payment penalties, and will usually waive them for a reasonable fee.

Prepayment penalties are more common on subprime mortgages because the lender wants you to have a large balance in the early years of the mortgage when the interest rate is often very high. Because of this, they are sometimes unavoidable on a subprime mortgage.

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