What are mortgage loan origination fees?
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UPDATED: Sep 20, 2013
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A mortgage loan origination fee refers to the charges for the paperwork and labor gone into deciding whether to grant a borrower financing. Origination fees are determined by calculating together the effort it took to evaluate a borrower’s income, debt, employment record, and other personal financial information. An origination fee can sometimes total to a full 1 percent of the mortgage loan in question.
Borrowers pay loan origination fees to the loan officer or broker that facilitated the mortgage loan. In essence, an origination fee is a commission that covers the paperwork of actually getting a loan. Click here if you are a borrower looking to apply for a home loan or to receive free mortgage rate offers.
One Person’s Fee, Another’s Income
Tim Lucas, Founder of My Mortgage Insider, said that it would not be a mistake to view origination fees as a mortgage loan lender’s profit.
“Typically a lender’s origination fee is 1 percent of the loan amount, but lenders have room to negotiate,” he said. “If the borrower can make two lenders compete, there’s a good chance one of them will reduce their origination charge.”
Lucas recommends that borrowers closely examine all the fees they are being charged and not just focus on the origination fee since those can prove quite expensive as well.
“If there’s no origination fee, but a $600 processing fee, a $1000 underwriting fee, and other high-dollar chargers, chances are the lender is making the loan origination fee without calling it as much,” he said.
The higher the loan a borrower is seeking, the easier it is to negotiate a lower origination fee, according to Lucas. This is because, for example, a $400,000 mortgage loan with a 1 percent origination fee will yield $4,000 for the lender. However, if the origination fee was 0.5 percent, the lender would still make $2,000 — which is what they would make for the same amount of work on an arguably more common loan amount of $200,000. The same negotiation attempt by a person seeking to borrow a $200,000 home loan would be much more difficult though.
Saving Money on Fees
Ken Maes, Vice President of the Northwest Division at Skyline Home Loans, offered some recommendations for homebuyers looking to reduce their origination fees.
First, and as counterintuitive as this may sound, borrowers can actually negotiate to “raise” their interest rate.
“A borrower can get a rate of 4.5 percent today with a Loan Discount fee of 1 percent or $2,000,” said Maes. “Let’s say the borrower needs to save his cash for his down payment. So instead of 4.5 percent, he raises his rate to 4.75 percent, but eliminates the Discount fee of $2,000. His payment will increase by $30.00 a month, but he has extra cash for the down payment.”
That extra cash can also cover the origination fee, thus saving the borrower some money — at least in the short run.
Another common practice Maes suggests is to negotiate for the home’s seller to pay for the origination fee.
Assuming a buyer wants a $200,000 home, they will also need to pay $5,000 in closing costs and prepaid items on top of their down payment. If both the buyer and seller agree to raising the home’s price to $205,000, the seller can pay $5,000 worth of the buyer’s closing cost. The solution allows the seller to get the same amount of cash at closing while covering the buyer’s closing costs.
But for those worried about securing the lowest possible interest rate, Rick McInturff, Senior Loan Officer for Proficio Bank, said that origination fees actually have very little to do with interest rates.
“The origination fee is based on the value of the home and is calculated as 2 percent of the home’s value up to $200,000 and then 1 percent of the remaining value up to a cap of $6,000,” he said. “There is an allowable origination fee of $2,500 for home values below $125,000. Lenders do have the ability to reduce their origination fees but again, they are not based on rates.”
He also explained that loan officers are willing to reduce origination fees, but only to a certain degree since that is essentially how they are paid. Only when a competing lender offers a matching quote should borrowers expert an origination fee reduction. Even then, it is likely to be a small amount.