When buying a home, one of the first things you’ll notice is that there are all sorts of costs that come as you go through the process. Buying a home is expensive to begin with, so you might be surprised to find that as you go along, there are comparatively small costs that can add up to you spending thousands more on your home than you expected.
Among these costs are mortgage origination fees.
Here’s what you can expect — as well as what you can do to reduce the financial pain associated with origination fees.
What is a loan origination fee?
At some point in the process, a loan officer has to originate your loan. That is, there’s work involved with getting together the paperwork associated with issuing a home loan. Your loan officer has quite a few administrative duties to perform, including:
- Organizing and reviewing the documents you send
- Working with the underwriting department
- Looking at your income and analyzing how it could impact your ability to make your payments
- Verifying your claims on the loan application with the documentation you provide from banks, employers, and tax returns
- Checking your information and eligibility against available government mortgage programs
- Verifying that your loan could potentially be sold to investors
While we like to think that these types of fees are “junk” and unnecessary, the reality is that someone, somewhere has to do the work. However, that doesn’t mean that all lenders charge the same amount for this work, or that you don’t have room to negotiate.
Chances are, however, that you won’t always see the term “origination fee” when looking at your paperwork. Check your Loan Estimate for items like “underwriting fees,” “processing fees,” and “application fees.” You should be able to identify your origination fee fairly easily in this three-page summary. If you can’t find the information, ask your loan officer to point it out.
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While not strictly loan origination fees, mortgage points are sometimes paid as an upfront cost of your loan. For the most part, points represent 1% of the loan amount. You can receive an interest rate deduction for paying points.
For example, you might get a 0.25 point reduction in your loan for each point you pay. If you pay two points on a loan of $200,000, you’re paying $4,000 upfront in exchange for a reduction of 0.50 on your interest rate. So a rate of 4.75% might end up being 4.25% instead.
Depending on the size of your loan and how long you have it, that interest rate reduction could end up being worth the points you paid upfront.
Make sure you understand what you’re getting into when paying points because sometimes lenders might talk about “points” as 1% of the loan amount even when they’re talking about your loan origination fee. They might say something like, “your origination fees amount to one point.” That’s their way of saying your origination costs are equal to 1% of your loan amount.
Verify that if you “pay points,” you’re reducing your interest rate, and the money isn’t just going toward paying your loan administration costs.
How much is a typical loan origination fee?
Every lender is different, so you won’t find a uniform amount for origination fees. In many cases, you’ll find that your lender charges a percentage of your loan amount, usually amounting to between 0.5% and 2% of your mortgage.
To some borrowers, that might seem a little strange. After all, if you’re getting a loan for $200,000, it takes about the same amount of work to originate the loan as it would for a $400,000 loan. Yet there’s a chance the borrower paying for a bigger mortgage will pay a higher amount.
When deciding how much you’re willing to pay for a loan origination fee, it’s important to consider interest rates and other fees you might be paying.
Realize that a mortgage loan origination fee (and points, too) can be rolled into your mortgage. So if you decide not to pay the fees with cash out of your pocket, they could be added to your mortgage balance — and then you must pay interest on them. Carefully consider this as well when deciding how to proceed.
Tips for Reducing a Loan Origination Fee
You’re already paying quite a bit for your mortgage, so it makes sense to try to reduce your loan origination fee. After all, every little bit saved is money you can spend to buy new furniture for your new home. If you want to reduce your origination fee, here are five strategies to try:
1. Shop Around
No matter what you’re buying, one of the best ways to get a good deal is to shop around. Ask between three and five lenders for quotes on mortgages, including what their loan origination fee will be. Get a total dollar amount for the upfront fee charged, along with the interest rate being charged.
Run the numbers to see where you’ll get the best deal. Remember: sometimes it’s worth it to pay slightly higher fees if you can get a better rate. Look for the overall cost of the loan over time as you make your choice.
Ask the lender to waive some of the origination fee. Identify different fees, and see if some of them can be dropped from the cost. It’s easier to get results if you can show quotes from other lenders and can compare fees. If you’re a good potential borrower, a lender might be willing to give you a break in order to get your business.
3. Accept a Higher Interest Rate
In some cases, if you’re willing to take a higher interest rate, the lender might be willing to put money toward your closing costs. Realize, though, that a higher interest rate could cost you more money over the life of your loan, and you might be better off just paying the loan origination fees.
This strategy can sometimes work best when you know you’ll sell your home in a relatively short period of time. That way, your interest costs don’t wind up exceeding the savings you received from getting a discount on your origination fee.
4. Ask for Seller Concessions
You might be able to get your loan origination fee included in closing costs covered by the home seller. That way, the seller of the home covers these costs instead of you. However, depending on the situation, you might need to increase your offer price a little bit. Additionally, make sure that this condition appears in the purchase agreement.
5. Gifts from Relatives
Gifted funds can be used to help pay your loan origination fee. In this case, though, you must be clear that the funds are a gift. On top of that, the giver might need to have a close blood relationship with you and state that the funds are a gift — no strings attached — in writing.
If you know someone willing to do this for you, it can be a way to save a little extra money. And you can let your relative off the hook when it comes to getting you a house-warming gift or birthday presents for the next several years.
Stay Sharp and Get the Best Deal
Buying your first home is a big deal. It’s also one of the most complex financial transactions you’re likely to make during your lifetime. In order to avoid paying more than you have to, make it a point to pay close attention to the terms of your mortgage. The Loan Estimate is a great tool that can help you see your total loan costs.
Shop around, comparing mortgage lenders, ahead of time and ask about origination fees. Some lenders try to shift them to other titles or find other ways to make money, but if you compare total costs and run the numbers, it should be possible to get the best deal for you.