One of the things you’ll pay for when getting a mortgage loan is an origination fee. Here’s what you need to know about origination fees and why you pay them.
What Is a Mortgage Loan Origination Fee?
Origination means to create, so the loan origination fee is the price you pay for the lender to create your mortgage loans. This includes collecting all the documentation, scheduling appraisals and title searches, creating a digital file for you and doing a financial background check on you to make sure you are capable of repaying the mortgage. It also includes the lender’s cost to verify all your income and asset documents and check that your property qualifies for the particular loan program you want.
How Much Are Loan Origination Fees?
The amount you pay varies by lender, but it can be anywhere between 0.5% and 1% of the loan total. If you take out a mortgage loan for $300,000, this could work out to be between $1,500 and $3,000.
And if you decide to pay mortgage points or discount points, those will be listed under your origination costs as well. A discount point is equal to 1% of the loan balance and each point you pay allows you to buy down your interest rates by roughly 0.125%.
Why Am I Charged an Origination Fee?
This is partly how your lender makes their money. In order to create a mortgage, they have to pay themselves or their employees to do the actual work of generating and underwriting a new home loan. These costs can also go towards paying for the lender’s business overhead.
When Do I Pay the Origination Fee?
The origination fee is due when you sign the final paperwork on your loan as part of the closing costs. Closing costs include all the fees associated with putting your mortgage together, including credit check fees, appraisal charges, homeowner's insurance, prepaid property taxes, mortgage insurance, recording fees and transfer tax charges. Closing costs can amount to 3%-6% of the loan total.
Can I Avoid Paying an Origination Fee?
Some lenders advertise that they do not charge an origination fee, but they have to make their money somehow. So, while you may not pay an upfront origination fee, the lender might instead charge you a slightly higher interest rate to earn that money slowly over time. Or they might simply put that fee under another name like a processing fee or add it to the underwriting fee. Be sure you check the true cost of the loan by comparing the annual percentage rate (APR) to other loans with origination fees. Oftentimes you will end up paying more in the long run with a No Origination Fee loan. However, in some cases you may be willing to pay a little more each month to lower the up-front, out-of-pocket costs.
If it is a buyers’ market, you can also try to negotiate with the seller to pay your origination fee. In short, origination fees are one of the fees you pay to buy or refinance a home.
If you are Iooking to buy or refinance a home, please give us a call. We would love to work with you!