The origination fee is one of the most important terms you need to learn if you want to get a mortgage on a property. Before a lender can give you a loan, they will judge your qualifications other than calculating your risk. And when they decide to give out a loan, they will charge you a couple of fees to help them finance other people looking for a mortgage loan.
One of the most important fees they will charge you is the origination cost or fee. And this term might seem unfamiliar if you do not know anything about mortgage talk. Other than knowing what this fee means, you also need to know how to calculate it and when you need to pay it. You will also find other important things about this fee that you might need to learn, including why it exists in the first place and some things you need to look out for.
All of the things that we have mentioned above might be pretty overwhelming. However, you do not need to worry. We are going to tell you everything there is to know about this kind of fee. That way, you will know what to expect when you are applying for a mortgage on your home.
Mortgage Origination Fee Definition
The first thing you need to learn is the definition of origination cost. Essentially, this kind of fee is the fee you need to pay to the lender of the mortgage for processing the loan that you are going to take. The average cost of this fee is around 0.5 to 1% of the loan that the lenders will give you. The lender might also offer you a particular interest rate, which will cost you other origination charges involved in prepaid interest points.
You need to pay prepaid interest points, also known as discount points or mortgage points, to get a lower interest rate on the loan. One prepaid interest point is usually around 1% of the total loan amount. However, you can also buy the points down to 0.125% in increments. You might also want to learn about the origination fee vs points if you
want to know about this topic even further.
Another term you need to know is closing costs. You will need to pay the closing costs before the lender can give you a loan. And you can lower the closing costs by taking a lender credit. By doing this, you will get lower closing costs but a slightly higher interest rate.
You should understand that the origination cost might cover a couple of things. You can break down all of these things when you are calculating your loan estimate. The origination cost will cover the processing of your loan, collecting the documentation, filling out the required paperwork, underwriting the loan, and scheduling appointments.
You must know that underwriting is also a very important part of loan processing. It is when the lender verifies your qualification for the loan that they are giving you. The underwriter will verify all of your asset documentation and income on top of other requirements that many loan programs will need you to fulfill. Other than that, they will also verify whether or not the property is qualified for certain loan programs, judging the value and safety of the property. Considering that a lot of work needs to be done before a loan can be given, you need to pay the origination fee.
When to Pay for the Fee
Now that you know what is an origination fee, you need to know when you have to pay it. In mortgage loan transactions, you usually need to pay this fee when you are paying for the closing costs. Aside from the down payment, the closing costs usually involve a couple of other fees. These fees include the origination cost, application fee, appraisal fee, credit check, mortgage insurance, VA funding fee, and many other costs.
The application fee is a fee you need to pay as a deposit for the loan. You will get the application fee back when the loan closes. If the loan does not close, you might lose some or all of your application fees. The lenders will then use the application fee to pay for the credit check or appraisal.
Another thing you need to pay aside from the loan origination fee is the appraisal fee. You need to pay the appraisal fee to help you determine the boundaries of the home that you are trying to buy. An appraisal might involve a survey, which is why it will cost you.
You might also need to pay the mortgage insurance when you are taking out a Federal Housing Administration loan. You will pay for this fee when you are closing the deal on the loan. You will also find a similar fee as the mortgage insurance fee on the United States Department of Agriculture loans. However, the fee is known as the funding fee or upfront guarantee fee in these loans.
If you are getting a loan from the Department of Veterans Affairs, you will not have to pay for mortgage insurance. However, you will need to pay a funding fee of around 1.4 to 6% of the total loan that you get. The value of this fee depends on your service status, the amount of your down payment, and whether or not it is your first time using this type of loan.
Some other fees you need to pay aside from the mortgage loan origination fee are the prepaid mortgage interest points, title insurance, Escrow fees, settlement agent fees, attorney fees, accrued interest, homeowner insurance, property tax, recording fees, transfer taxes, and real estate agent commission.
How Much Do I Need to Pay?
Now that you know the origination fee definition and some other fees you need to look out for, you also need to know how much it will cost. Well, the origination cost depends on how much loan you are taking out. Why? Well, simply because the origination cost comes from a certain percentage of the total amount of the loan.
As we have mentioned before, the origination cost usually ranges between 0.5 to 1% of the total loan. You might also need to pay for the mortgage points based on the interest rate that you get on the loan. So, if the lender approves you for a $300,000 mortgage, you will need to pay around $1,500 to $3,000 origination fee.
Why Do Origination Fees Exist?
You might be wondering why you need to pay for the origination cost in the first place. A lender has many reasons to charge this kind of fee. First of all, they need to cover the costs for appraisals and underwriters, which are not free.
Lenders also run a business by giving out loans. They need to make sure that they always have enough money to provide loans for other clients. That way, they can keep their business going. And that is why you need to pay this fee in the first place.
However, you should know that not all lenders will charge you this fee. Most lenders will charge you the origination cost for the services that they require. But not all lenders use this system to keep their businesses going.
A lot of lenders out there even promote that they will not charge you the origination cost. And these lenders will be very beneficial to people who do not want to pay a large number of closing costs. However, you still need to look out for a couple of things when you are taking out a loan from this kind of lender.
Hidden Costs You Might Find
If a lender states that they will not charge you with an origination fee mortgage, you need to look out for a couple of hidden costs that will surprise you. The first thing you will notice is a higher interest rate in these types of loans. And you will see a rise in interest rates throughout the loan. You will also find other hidden fees, including the rate lock fee, commitment fee, and underwriting fee.
The rate lock fee is a fee that you might need to pay when you lock your rate at a particular level. You need to pay this fee because the lender has to calculate the possibility of rising interest rates in the future. If you have a short rate lock period, you will pay a cheaper rate lock fee.
Another hidden fee you might find is the commitment fee. A lender might charge you a commission fee to help them keep their mortgage business going. They will charge a commitment fee for the guarantee of the loan.
Lastly, a lender might also charge you an underwriting fee. The underwriting fee is a mortgage origination cost in disguise. So, when you see a lender who states that they will not charge you with an origination cost, you might find the cost masked as something else such as the underwriting fee.
A lender who does not charge an origination fee will also charge you higher interest rates. They will charge you with higher interest rates to help them earn more money. That way, they will not run out of money to finance other homes.
What to Consider Before Taking Out a Loan
Knowing that you might face these hidden fees if a lender promises not to charge an origination cost, you need to truly do your research. You need to know every little fee that you need to pay to get approved for the loan. Other than that, you can also compare loan programs to help you determine the best loan you can take.
To compare loan programs, you need to thoroughly search for the pros and cons of each loan program. You have to compare the benefits and downsides of each loan program. That way, you can have a short list of loan programs that will give you more benefits than disadvantages. That is what you need to know aside from what are origination fees.
Frequently Asked Questions
When talking about origination charges, you might have a couple of questions that need answers. Luckily for you, we have assembled a couple of questions that people ask the most regarding origination costs. Here are some of those questions and their answers.
How to finance the origination cost.
A lot of people question how they can pay for the origination cost. Well, because you will pay for the origination cost at your closing, you will pay for this cost upfront. This means you will probably need to pay for the cost out-of-pocket. However, you can also finance the origination cost by negotiating seller concessions on your arrangement.
Why do loan origination fees exist?
The next question people often ask is why this fee exists in the first place. The answer to that is that lenders need to cover certain expenses while they are processing your loan. They need to pay for an underwriter and an appraisal. The origination cost will also help you get a lower interest rate for the loan.
Negotiating the origination cost
Lastly, people also question whether or not you can negotiate the origination cost. While the average loan origination fee usually strictly falls around 0.5 to 1% of the total loan, you can negotiate the price of this fee with the lender. However, finding a lender who is willing to negotiate this fee can be quite difficult. That is why you need to compare many lenders before you should close a deal.
Final Thoughts
The origination cost is one of the most important things you need to learn before applying for a loan. Other than knowing what is loan origination, you should also know other things about this fee. Thanks to our explanation, you can understand why the origination cost exists, when to pay for it, and some hidden costs you will find from lenders who do not charge you this fee.
Now that you know everything there is to know about the origination fee, you can start your research on some lenders who will help you finance your home.
