You can see offers for "flat fee mortgages" on TV or in the papers.

They usually offer a flat, low sounding fee.

These loans may seem like a tempting offer - who doesn't want to save?

Loans that offer low fees upfront just have the expenses included in the loan.

These fees are embedded in the loan in two ways:

-in the form of a higher interest rate

-a prepayment penalty

The first embedded expense, a higher interest rate, causes you to have a higher monthly payment.

This can be several hundreds dollars more per month.

The second embedded expense, a prepayment penalty, can cause a very large expense in the future.

This prepayment expense is usually triggered when a property is sold or refinanced. A "hard prepayment penalty" is triggered either by a refinance or a home sale. A "soft prepayment penalty" is triggered by the sale of the property, but not by a refinance.

A prepayment penalty exists for a predefined timeframe, such as 6 months or 2 years. After that period, there is no prepayment penalty.

A prepayment penalty is defined differently by different lenders. It is usually a function of the size of the loan and the interest rate on it. Some lenders will define a prepayment penalty as six months of interest on the outstanding balance, while others will define it in other ways.

If you expect to refinance before the prepayment penalty is over you then this may not be a good option for you.

One way or another, you will end up paying for your mortgage. You can do it upfront or make the expense part of the loan.