They say that the only thing's for certain a life or death and taxes.
If you borrow money you could add interest and fees to that list.
We just covered interest.
There are a variety of fees you pay when getting a loan.
The creation of a new loan is called originating alone the fees incurred during loan creation are called
origination fees.
There are some other fees that may be assessed over the life of the loan.
You may even be assessed a fear penalty when you pay off the loan.
Yes they can get you on the way in and on the way out.
One of the origination fees is explicitly named an origination fee.
It covers the bank's cost for making the loan.
The fee is often calculated as a percent of the original balance of the loan.
It often runs point 5 percent to 1 percent of the original balance.
The fee may also be just a flat dollar amount not stated as a percent of the loan balance the fee is
usually financed into the loan meaning it's added to the principal balance of the loan origination fees
are common on term loans a commitment fee is like an origination fee for lines of credit since the principal
balance of a term loan can vary wildly over the life of the loan.
The fee is based on the commitment amount when you get a commercial real estate loan.
The bank will likely require an appraisal to determine the value of the property being pledged as collateral.
The bank will order the appraisal and just pass the cost along to the borrower a lender doesn't want
to repossess collateral that has massive potential environmental liabilities those liabilities might
also risk the financial health of the borrower.
If there is the potential of an environmental issue the bank will require environmental testing.
For example the property may currently be or once a been a convenience store with underground gas tanks.
There are three levels of testing based on the risk.
Phase 1 Phase 2 and an environmental impact statement.
The testing costs are paid by the borrower late fees are assessed when the payment is late according
to the loan agreement.
In addition to the fee the interest rate of the loan may jump up to a much higher rate.
This is called default interest so a late payment can trigger both fees and increased interest costs.
The default interest rate will go down to the normal interest rate once the loan is no longer pass to
it's fairly rare for a prepayment fee to be a flat dollar amount or percent over the whole life of the
loan.
What's more common for business loans are declining prepayment fees stated as a percent of the loans
principal balance.
For example if the loan is prepaid in the first year you would pay 3 percent.
If it's the second year you pay 2 percent and if it's prepaid in the third year then you only pay 1
percent.
With that structure you won't pay a prepayment fee after that.
Another example is one that starts at 5 percent the first year and goes down 1 percent per year over
5 years here's a tip for avoiding a prepayment penalty.
See if the lender will waive it.
If you refinance with them rather than getting a loan somewhere else.
Companies usually prepay a loan subject to a penalty if current rates are significantly lower than their
old rate.
You can calculate if the cost savings of a lower rate would offset the prepayment fee of the current
loan and any origination fees of a loan.
You don't have to fully repay the loan though to trigger a prepayment penalty.
The agreement may say that repayment of 20 percent of the original balance may trigger a prepayment
penalty for the portion of the principal being repaid.
Make hole or yield maintenance prepayment fees are much trickier.
They are calculated as the difference between the interest that a lender would earn on the remaining
life of the loan at the original loan rate and what they would earn based on current loan rates.
For example the penalty is how much in today's dollars the bank would lose if you paid off your loan
at 7 percent and they replaced it with a 5 percent loan.
They would earn a lot less interest over the remaining life of your loan these fees go up as current
interest rates go down negating the financial incentive to refinance when rates go down the amount of
these fees is a complex calculation that's usually beyond the sophistication of the borrower.
The borrower needs to ask the lender what the fee would be if they prepared the loan.
These fees are usually included in loan agreements for long term fixed rate loans with national or regional
banks.
These banks are usually big enough to handle the sophistication of these penalties and work with larger
more sophisticated companies.
They also make loans more frequently that are big enough to place an interest rate swap on for the fixed
rate loan.
Banks funding sources are usually variable rate so banks use interest rate swaps to swap the fixed rate
payments from the loan into variable rate payments.
This reduces the bank's interest rate risk.