When funding your mortgage loan, a mortgage lender makes a judgement on your qualifications before taking a calculated risk. In exchange for giving you a mortgage to buy or refinance a home, lenders charge a variety of fees so that they can make money to provide more home financing to others. One of these fees is a mortgage origination fee.
In this post, we’ll go over the origination fee, how to calculate it and when you pay it. We also touch on why they exist, whether all lenders have origination fees and some of the things you have to look out for when comparing the costs charged by various lenders.
What Is A Mortgage Origination Fee?
A mortgage origination fee is a fee charged by the lender in exchange for processing a loan. It is typically between 0.5% and 1% of the total loan amount. You’ll also see other origination charges on your Loan Estimate and Closing Disclosure in the event that there are prepaid interest points associated with getting a particular interest rate.
Also called mortgage points or discount points, prepaid interest points are points paid in exchange for getting a lower interest rate. One point is equal to 1% of the loan amount, but you can buy the points in increments down to 0.125%.
If you’re trying to keep closing costs at bay, you can also take a lender credit, which amounts to negative points. Here, you get a slightly higher rate in exchange for lower closing costs. Rather than paying up front, you effectively build some or all costs into the life of the loan.
The origination fee itself can cover a variety of things, some of which may be broken out in your Loan Estimate. It covers things like processing your loan – collecting all the documentation, scheduling appointments and filling out all necessary paperwork – as well as underwriting the loan.
Underwriting is the process of verifying that you actually qualify for the loan. The underwriter has to verify all income and asset documentation as well as any other requirements associated with particular loan programs. In addition to this, they also have to verify that the property meets the requirements of a particular loan program including coming in at the right value and being safe. This last part is done in conjunction with an appraiser.
How Much Are Loan Origination Fees?
Typically, a loan origination fee is charged as a percentage of the loan amount. Furthermore, it’s usually anywhere between 0.5% – 1% of the loan amount plus mortgage points associated with your interest rate.
To put an actual number to that, let’s say you have a $300,000 mortgage approval. The origination fee would be anywhere between $1,500 – $3,000.
When Do You Have To Pay The Origination Fee?
Mortgage origination fees are usually paid as part of closing costs. In addition to your down payment, closing costs may include the following, although they can vary depending on whether the transaction is a purchase or refinance.
- Origination fee: As mentioned before, this can be anywhere between 0.5% – 1% of the loan amount before prepaid interest points and is used to cover such things as the processing and underwriting of your loan.
- Application fee: Lenders often treat this fee a bit like a deposit. You get it back if the loan closes. If it doesn’t close, you may lose some or all that. The reason for this is that lenders will often use it toward covering the cost of an appraisal or credit check.
- Appraisal fee: If not covered under the deposit or not covered in full, you’ll have to pay separately for the cost of any home valuation and safety check. If it’s necessary to determine the boundaries of the property, a survey fee may roll up into this.
- Credit check: If you didn’t have it covered by your deposit, you also pay for a credit check at the time of closing. This is one of the cheaper fees at no more than $30 typically.
- Mortgage insurance: With FHA loans, there’s upfront mortgage insurance premium paid at closing. USDA loans have something that functions similarly to mortgage insurance, but it’s called the upfront guarantee fee. In both cases, a percentage of the loan amount is paid at closing. If you’re getting a conventional loan, you can also choose to pay for mortgage insurance upfront so that you have the same payment on a monthly basis that you would without mortgage insurance even if your down payment was less than 20%.
- VA funding fee: VA loans don’t have mortgage insurance, but they do have a funding fee that’s anywhere between 1.4% – 3.6% of the loan amount, depending on the size of your down payment, your service status, whether it’s your first time using a VA loan, and whether it’s a purchase, full refinance or VA Streamline. It can either be paid at closing or built into the loan amount in most cases. Those receiving VA disability, qualify surviving spouses of those who passed in action or as a result of the service-connected disability and Purple Heart recipients are exempt from paying the funding fee.
- Prepaid mortgage interest points: If you choose to buy down your interest rate by paying for interest upfront in order to save money over time as you stay in the house, you pay for these as a percentage of the loan amount at closing.
- Title insurance: Although this is usually paid by a seller, this is one of those things that can be negotiated, so in all cases, someone will have to pay for a lender’s title policy which protects the lender in the event that someone else comes along with a claim to your home. It’s also possible to get an owner’s title policy which covers you in case something like this comes up.
- Escrow fees: An escrow account within the closing process helps both the buyer and seller because it prevents anyone from taking shared money for closing costs out of the account without authorization.
- Settlement agent: There’s a settlement agent who is responsible for overseeing the closing and acting as a notary. They have to make sure you understand what you’re signing and that everything goes smoothly.
- Attorney fees: In some cases, an attorney has to be present at the closing in accordance with state law.
- Accrued interest: When you close your mortgage, there’s a time frame between when you close and your first mortgage payment. Your lender will usually have you pay the daily interest charges until that time.
- Homeowners insurance: You usually have to pay between 6 months and a year of mortgage insurance premiums upfront along with setting up an escrow account, depending on the size of your down payment.
- Property tax: You’ll have to pay up to a year of property tax when you close on your loan for public services. If it’s a purchase, there’s a property tax research service that will also have to be paid. The goal for this service is to estimate your property taxes as closely as possible so you don’t end up with any negative surprises. This service will also let your mortgage servicer know if you miss any property tax payments.
- Recording fees and transfer taxes: When you buy a home, your county or other local authority has to do some work recording the transaction in the public register, and you pay for that.
- Real estate agent commission: In a purchase, this is typically 6% of the purchase price with 3% going to each agent. This is often paid for by the seller, but who pays is negotiable, which is why we’ve included it here.
It varies widely depending on the details of the transaction, but closing costs typically range anywhere from 3% – 6% of your loan amount.
Why Are Mortgage Origination Fees Assessed?
Every lender has costs associated with originating a loan. Whether that’s the overhead for their business or paying bankers, underwriters and scheduling appraisals. The goal is always to make enough money to be able to provide loans to help more people with their home financing. Origination fees cover some of these costs.
Do All Lenders Charge An Origination Fee?
Not all lenders charge an origination fee, but the majority do as compensation for the services being provided. The origination fee is charged at the discretion of an individual lending institution.
Some lenders make a big deal out of advertising mortgages with no origination fee. There’s nothing wrong with this, and it can be good for people who want to save on closing costs. However, you should be aware that the lender is going to try to make up for that by making money in other areas, often by charging a higher interest rate. If the interest rate is a higher, another thing they might do is give that be a different name than origination, but that doesn’t mean it’s still not there.
Hidden Costs Of The No Origination Fee Mortgage
If a mortgage truly has no origination fees, you’ll end up paying a higher interest rate over the course of the loan in the vast majority of cases. A lender has to make money somehow. Depending on how long it takes you to pay off the loan, this could cost you up to tens of thousands of dollars over the life of the mortgage. While you’re saving money up front, it could cost you way more in the long run.
If the interest rate isn’t any higher, the lender is likely just calling the fee something else, like an underwriting or processing fee. In many cases, this is exactly what the origination fee is meant to cover, so it’s the same thing.
Other Fees That Add Up
It’s important as someone buying or refinancing a home to understand that there are various points at which a fee can be charged. While the majority of mortgage fees not related to the interest rate that you would get are closing costs, there are others. Let’s run through them.
- Rate lock: When you lock your rate at a certain level, your lender has to hedge against the possibility that interest rates rise in the near future. You pay for this privilege in the form of a rate lock fee. The shorter the rate lock period, the cheaper it will be.
- Commitment fees: A lender has to set aside funds for a loan in advance of when they actually give it out. In exchange for the guarantee of the loan at some point in the future, they charge a commitment fee. This is a hedge against conditions in the market changing. As long as it was approved, this lets the client get the money as long as they close.
- Underwriting or Processing fees: If you see an underwriting or processing fee instead of an origination fee, it’s an origination fee masquerading as something different. It’s the charge for the lender processing any provided documentation and making sure you qualify for the loan.
Higher Interest Rates
As mentioned before, if there truly is no origination fee – and for the purposes of this discussion, I’m including things serving a similar purpose that go by a different name in that category – the lender is likely to make up for it by charging you a higher interest rate to make more money on the back end of the loan.
To help you put some numbers to this, let’s take a look at an example for a 30-year fixed mortgage on the $300,000 home. You can use our calculator to try your own numbers. It’s also helpful to know that mortgage closing costs are also often talked about in terms of points. One point is equal to 1% of the loan amount.
With a 20% down payment, your loan amount would be $250,000. First, we’ll take a look at a rate with 1 point of closing costs. Perhaps by paying 1 point at closing, the rate you can get is 3.75% in this hypothetical scenario. You would pay $2,500 upfront and $166,804 in interest over the life of the loan with a $1,157.79 monthly payment.
Now let’s take a look at that same $250,000 loan with no points paid. Let’s say that rate was 4.5%. Your monthly payment becomes $1,266.71 while paying $206,016.76 in interest. In the second scenario, you end up saving $2,500 upfront, but you also pay more than $39,000 more in interest.
Another thing that’s important to know when you opt for a higher monthly payment is that it will make your debt-to-income ratio (DTI) higher because you’re spending more on a monthly basis to make payments on existing debts. This can impact your ability to qualify for other loans in the future, because DTI is a key metric used by lenders. You don’t want to take on such a high monthly payment that it’s going to hinder your financial flexibility in the future. If you opt for a no-origination-fee loan, it’ll likely come with a higher interest rate leading to a higher monthly payment. This could push your DTI up significantly.
When lenders are speaking to you about their fees, and in some cases their lack of them, it’s always important to figure out what you’ll actually be paying over the life of the loan and weigh the benefits and downsides of a no origination mortgage. One way to do a quick comparison is to look at the interest rate. When you shop different interest rates, there are two interest rates you’ll see. The first one is the interest rate your monthly payment is based upon. The second one is called the annual percentage rate or APR and will be higher. This is your interest rate with closing costs accounted for. When comparing loan options, you’ll always get a better idea by comparing the APR.
Compare Fees And Rates Carefully
A mortgage origination fee home to cover the cost of services rendered by a mortgage lender to set up your loan. They range anywhere from 0.5% – 1% of the loan amount typically and are paid at closing. If you have prepaid interest points associated with getting the interest rate for your loan, these will also be listed with the other origination charges on your Loan Estimate or Closing Disclosure.
Although not every lender charges an origination fee, if they don’t, they typically make up for it by charging a higher interest rate on the loan itself, so always be aware of the up and downsides. You may be saving money at closing, but paying more in the long run.
We hope this is given you a better understanding of the structure and purpose of origination fees so that you can be a more educated mortgage shopper. If you’re interested in getting started with your mortgage process, you can apply today!