What Fees Should I Expect With Alternative Financing?
Alternative financing can involve more fees than a standard bank mortgage. Those costs should be clearly understood before you proceed so you know the total cost of the financing and how much money you will actually receive.
← Back to Alternative Financing QuestionsAlternative Financing Usually Costs More Than Conventional Bank Financing.
The interest rate is only one part of that cost. Depending on the lender and transaction, there may also be lender fees, broker fees, appraisal costs, legal fees and other closing expenses.
Lender Fees
Some alternative and private lenders charge a lender fee as part of arranging the mortgage. The amount depends on the lender, risk and structure of the transaction.
Broker Fees
A broker fee may apply on alternative or private financing. Any applicable fee should be disclosed clearly before you commit to the mortgage.
Appraisal Cost
A current appraisal is commonly required to establish the property's value and loan-to-value. The borrower is generally responsible for the appraisal cost.
Legal Fees
A lawyer is required to complete the mortgage transaction. Legal fees and disbursements vary depending on the complexity of the file.
Existing Mortgage Costs
Paying out an existing mortgage may involve discharge costs, interest adjustments or a prepayment penalty depending on the current mortgage terms.
Other Closing Costs
Title-related costs, registrations, searches or other transaction-specific expenses may also form part of the closing.
The Total Cost Matters More Than One Number.
Comparing mortgages only by interest rate can be misleading. The better comparison is the complete cost of the proposed financing and what it accomplishes for you.
An alternative mortgage can have a higher rate and additional fees but still make financial sense if it eliminates much more expensive debt, resolves arrears or creates the time needed to improve the overall file.
Understand the actual mortgage rate and how interest will be calculated.
Add the lender, broker, appraisal, legal and other applicable costs.
Know what the new mortgage will require from your monthly cash flow.
Understand how much money will actually be available after payouts and applicable costs are deducted.
The Financing Should Solve a Bigger Problem Than It Creates.
Alternative financing is not the cheapest lending option. The reason to use it is because the solution provides enough value to justify the additional cost.
Eliminating Expensive Debt
Consolidating high-interest credit cards and unsecured debt can improve overall monthly cash flow even when the mortgage rate is higher than a bank rate.
Resolving Mortgage Arrears
Alternative financing may provide a way to deal with arrears before the situation progresses into more serious lender enforcement.
Dealing With CRA Debt
Using home equity to resolve tax debt can sometimes create a cleaner and more manageable financial structure.
Creating Time
A short-term alternative mortgage can provide time to rebuild credit, establish income or address another issue preventing conventional qualification.
Protecting Equity
In an urgent situation, the cost of alternative financing may be reasonable compared with allowing a larger financial problem to continue.
Returning to Better Financing
The shorter the period you need higher-cost financing, the easier it is to justify the cost when there is a realistic exit strategy.
Know the Full Cost Before You Say Yes.
Before proceeding, you should understand the interest rate, lender fee, broker fee, appraisal cost, legal costs, expected payment and the net amount available after the transaction closes. Then you can decide whether the solution is worth the cost.
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