As you go through the process of purchasing a home, you may be caught off guard by the various expenses that arise. While buying a home is already a costly endeavor, you may be surprised to find that small fees and charges can quickly add up. They can potentially increase your overall spending on the home by thousands of dollars.
Among these costs are mortgage loan origination fees.
Here’s what you can expect — as well as what you can do to reduce the financial pain associated with mortgage origination fees.
What is a loan origination fee?
At some point in the process, a loan officer has to originate your loan. There’s work involved with getting together the paperwork associated with issuing a home loan. In addition, 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 monthly payment
- 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. Sometimes lenders might be talking about “points” as 1% of the loan amount even when they’re talking about your origination fees. 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?
Loan origination fees can vary greatly among lenders and are not uniform. However, it’s common for lenders to charge a percentage of the loan amount, typically between 0.5% and 2% of the 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 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, you could add them to your mortgage balance — and then you must pay interest on them. So, carefully consider this when deciding how to proceed.
Tips for Reducing a Loan Origination Fee
Since you are already paying a significant amount for your mortgage, it may be beneficial to try to lower your loan origination fee. Every dollar saved can be put towards purchasing new furniture or other expenses for your new home. Here are some strategies to consider if you want to reduce your origination fee:
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 mortgage 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 at the overall cost of the loan over time as you make your choice.
Ask the mortgage 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 compare fees. If you’re a good potential borrower, a lender might be willing to give you a break to get your business.
3. Accept a Higher Interest Rate
A mortgage lender may be willing to cover your closing costs in exchange for a higher interest rate on your loan. However, keep in mind that a higher interest rate may result in additional costs over the lifespan of the loan. So, it’s typically better to pay loan origination fees upfront rather than agreeing to a higher interest rate.
With that said, this strategy may work 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 origination fees included in closing costs covered by the home seller. That way, the home seller covers these costs instead of you. However, you might need to slightly increase your offer price depending on the situation. Additionally, make sure that this condition appears in the purchase agreement.
5. Gifts from Relatives
It is possible to use gifted funds to cover mortgage origination fees. However, it must be clear that the funds are genuinely a gift. The donor may need to have a family member. They may also have to provide a written statement that confirms the donation is a gift with no strings attached.
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. But, unfortunately, it’s also one of the most complex financial transactions you’re likely to make during your lifetime. 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 to help you see your total loan costs.
Shop around, compare mortgage lenders, and ask about origination fees ahead of time. Some lenders try to shift them to other titles or find other ways to make money. However, if you compare total costs and run the numbers, getting the best deal for you should be possible.