Mortgage origination fees: What are they and how to avoid them
Buying a home is an exciting adventure, but it can be a bit overwhelming when it comes to financing your purchase. Many people think about their down payment and the type of home loan they want when they’re shopping. However, there’s one expense that many buyers forget about: loan origination fees. These fees can add several hundred or thousands of dollars to the total cost of your loan.
All mortgage lenders charge fees. These fees help them earn money on their loans. However, many people assume that the interest rate includes all of their fees or closing costs.
But that’s not always the case. Lenders can include some of their expenses into their interest rate and then charge additional fees on top of that. Using a tool like Credible is a simple way to compare offers and rates from multiple lenders at once to ensure you're getting the best deal possible.
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What are mortgage origination fees?
Mortgage origination fees include a wide range of charges the lender tacks on to increase their revenue on a loan. You may find these upcharges listed in several ways, including:
Appraisal review fee
Document preparation fee
Credible can help you compare lender offers within minutes to determine which makes the most financial sense for you.
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When you’re reviewing your loan documents, pay special attention to the section called “Closing Cost Details.” This page lists everything the lender expects the buyer to pay. There are some things you can’t shop around for (like appraisal fees, credit report fees, and taxes). However, other costs, like those listed under “origination charges” could be negotiable. You’ll find your origination fees listed on the second page of your loan estimate in section A.
How do mortgage origination fees work?
Many lenders quote origination fees as a percentage. On average, they range from .5 percent to 1 percent of the total loan cost. Origination fees can also include point purchases (money you pay towards getting a lower interest rate).
For example, if you take out a $400,000 loan, you can expect your origination fees to be between $2,000 and $4,000. Before the housing crisis of 2008, lenders charged as much as 5 percent of the total loan cost as loan origination fees. Since then, the federal government passed laws against predatory lending to help lower those fees.
Mortgage origination fees cannot increase at closing except for specific circumstances. The costs could go up if you changed the type of loan you want, you reduce the down payment, the home’s appraisal came in lower than expected, or your credit score has changed, according to the Consumer Financial Protection Bureau.
Working with an experienced loan officer can make navigating the closing process much more manageable. Consider an online tool, like Credible, to streamline your lender research and to find an experienced lender who understands your financial situation. You can also find out what mortgage rates you currently qualify for.
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How can I minimize origination fees? Do I have to pay them?
Some loan origination fees may be negotiable; however, buyers will likely have to pay most of them. Lenders are often more willing to negotiate origination fees for higher loans, to encourage a customer to work with them. Most lenders won’t waive all the loan origination fees, as this is the primary way that they earn money from each transaction.
Opting out of a loan origination fee could also result in a higher interest rate -- and a higher monthly payment -- since the lender needs to make money off loan transactions. Lenders may offer “lender credits,” which helps cover origination fees, but usually results in a higher interest rate.
Alternatively, you could ask the seller to pay for the loan origination fees as a concession. However, most sellers will only agree to this if they are having a difficult time selling the property, or they want to move quickly.
While you may not be able to avoid origination fees altogether, you can get the best deal possible by shopping around. Comparing multiple lenders takes a little extra time, but it can save you thousands of dollars over the life of your loan.
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It never hurts to ask the lender if they’d be willing to negotiate with a smaller fee. You’ll want to bring a higher down payment or an excellent credit score to encourage your lender to consider a lower price.