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Sorting through the garbage mortgage fees

DEAR BOB: My husband and I have been looking for a mortgage. Although we've been reading your articles for about a year, we still find ourselves wondering what real costs a mortgage company can charge and what are just moneymakers for the brokers.

We recently received a "good faith estimate" from a mortgage broker that contains the following fees: tax service contract, $85; underwriting review, $450; processing fee, $395; document preparation fee, $175; flood certification, $25; recording fee, $65; wire fee, $35; closing review/courier, $195; certification, $295; warehouse fee, $65; appraisal fee, $450; and credit report, $55, for a total of $2,290. Under "title charges," they list settlement/closing fee $645 and $1,473 title insurance.

Which of these are garbage fees and which are real? Based on other lenders I have contacted, these fees seem extravagant. _ Finest B.

DEAR FINEST: Congratulations on questioning those fees. Home-loan lenders probably attend a "garbage fee/junk fee training school" to learn how to create and inflate borrower fees. However, I notice you did not include a customary loan fee, such as 1 percent to 2 percent of the amount borrowed. Many lenders charge loan fees, but not all the garbage junk fees on your estimate.

The $85 tax service contract fee is to monitor your property tax payments since you wisely will not be having an escrow impound account. Last year, I paid a $65 tax service fee on my refinance, so your $85 fee might be inflated.

The $450 underwriting review, $395 processing fee, $175 document preparation fee, $195 closing review/courier fee, $295 certification fee and $65 warehouse fee are pure garbage profit fees for the mortgage broker. The $450 appraisal fee is $100 to $150 too high (unless the house is huge), and the $55 credit report costs the lender much less.

The $645 settlement or closing fee, often called an escrow fee, and the $1,473 title insurance fee (unless you can get the seller to pay) should be paid directly to the third-party providers and are really not part of your mortgage costs.

Mortgage brokers obviously need to earn a profit, but rather than charge inflated junk or garbage fees, a better procedure is to charge a 1 percent or 2 percent loan fee, which is tax-deductible for you on a home acquisition mortgage but not on a refinanced mortgage.

Ask the mortgage broker about the exact amount the actual lender is paying the broker to process the loan. These "kickbacks" raise the broker's true fees.

Shop around among at least a half-dozen mortgage lenders and compare their interest rates and fees. The lowest interest rate loan often has the highest junk fees. By the way, junk fees are negotiable, so don't hesitate to ask the lender to reduce the high fees the lender doesn't have to pay to third parties, such as the title fees.

DEAR BOB: I sold my rental property a few years ago and carried back the mortgage for my buyers. Now they are selling the property and paying off my mortgage. But I will be paying a heavy capital gains tax on this installment sale mortgage. Is it possible to do an IRC 1031 tax-deferred exchange and transfer the proceeds into acquiring a rental property to avoid the tax? _ Rose D.

DEAR ROSE: Sorry, but an Internal Revenue Code 1031 tax-deferred exchange can take place only at the time you sell rental, business or investment property. You could have made an immediate exchange or a Starker delayed exchange, but you cannot now defer capital gain tax by using the mortgage payoff proceeds to buy a rental property.

However, you should be glad you sold your property several years ago and deferred the capital gains tax by carrying back the mortgage since the federal capital gains tax rates have declined to 20 percent (15 percent if you are in the lowest tax bracket). Consult your tax adviser for details.

DEAR BOB: In September we bought a mobile home for $55,000. On April 3, we sold our old "big home" for $127,000. I know we can take the $500,000 exemption on that sale because we lived there 20 years. But if we sell the mobile home after living in it for a year, can we also use the $500,000 exemption on its sale although we paid $55,000 for it? _ Mrs. E.B.

DEAR MRS. E.B.: No. Internal Revenue Code 121 can be used only once every two years. If you profitably sell your mobile home after living in it for only a year, because you used your $500,000 exemption on the September 1998 profitable sale of your "big home," the mobile home-sale profit will be taxed as a capital gain. Ask your tax adviser for details.

_ Tribune Media Services