If you've ever gotten a mortgage, you probably already know that they can be quite expensive. If you're purchasing a home, not only will you need to bring in your down payment, but you'll also need to pay for a whole host of closing costs. If you're refinancing, you may discover that thousands of dollars of closing costs are being rolled into your new loan balance. One particular closing cost that borrowers commonly question are origination fees. So what exactly are origination fees? What are they for, and why are they charged?
Why Origination Fees?
Lenders basically charge origination fees to help cover their overhead. In addition to third-party services like title, escrow, appraisers, tax certification, government recording, flood certification, home inspections, etc., which are all covered by third-party closing costs, lenders also employ in-house processors, underwriters, loan originators, and funders. These in-house services are paid for by origination fees.
Origination fees are also used to cover costs for certain interest rates. One of the trade-offs in mortgage financing is rate versus costs. In other words, the lower the rate the higher the cost. This is why it is so important that when you shop for a mortgage you shop for both rate and cost.
If your financial profile includes certain risk factors such as low credit scores, high loan-to-value, and/or you're cashing out equity, some additional pricing may kick in that could increase the cost of your mortgage. These pricing adjustments are called loan-level pricing adjustments, or LLPAs, and they are usually charged as part of the origination fee.
If you are being asked to pay for a very expensive origination fee, consider taking a slightly higher interest rate and letting the lender absorb all or part of the origination fee into the interest rate. Again, the trade-off is between rate and costs. If the costs of the loan are very high, you may be able to reduce the cost by taking a slightly higher rate.
Mortgage lenders are required to disclose all closing costs to you on a document called the Good Faith Estimate, which must be sent to you within three business days of completing your loan application. Any origination fees the lender is charging will be disclosed at the top of page 2 of the Good Faith Estimate.
You May Be Able to Negotiate a Reduced Origination Fee
Because origination fees are charged by the lender to help cover their overhead, they often can be negotiable. You want to ask about a reduced origination fee near the end of the loan process right before closing. Lenders don't get paid on the loan until it is finished, so they are very motivated to get it done once you're near closing.
We can't guarantee that they'll say yes 100% of the time, but it absolutely doesn't hurt to ask.
Why Origination Fees?
Lenders basically charge origination fees to help cover their overhead. In addition to third-party services like title, escrow, appraisers, tax certification, government recording, flood certification, home inspections, etc., which are all covered by third-party closing costs, lenders also employ in-house processors, underwriters, loan originators, and funders. These in-house services are paid for by origination fees.
Origination fees are also used to cover costs for certain interest rates. One of the trade-offs in mortgage financing is rate versus costs. In other words, the lower the rate the higher the cost. This is why it is so important that when you shop for a mortgage you shop for both rate and cost.
If your financial profile includes certain risk factors such as low credit scores, high loan-to-value, and/or you're cashing out equity, some additional pricing may kick in that could increase the cost of your mortgage. These pricing adjustments are called loan-level pricing adjustments, or LLPAs, and they are usually charged as part of the origination fee.
If you are being asked to pay for a very expensive origination fee, consider taking a slightly higher interest rate and letting the lender absorb all or part of the origination fee into the interest rate. Again, the trade-off is between rate and costs. If the costs of the loan are very high, you may be able to reduce the cost by taking a slightly higher rate.
Mortgage lenders are required to disclose all closing costs to you on a document called the Good Faith Estimate, which must be sent to you within three business days of completing your loan application. Any origination fees the lender is charging will be disclosed at the top of page 2 of the Good Faith Estimate.
You May Be Able to Negotiate a Reduced Origination Fee
Because origination fees are charged by the lender to help cover their overhead, they often can be negotiable. You want to ask about a reduced origination fee near the end of the loan process right before closing. Lenders don't get paid on the loan until it is finished, so they are very motivated to get it done once you're near closing.
We can't guarantee that they'll say yes 100% of the time, but it absolutely doesn't hurt to ask.
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