If you've ever had a mortgage, you've probably already discovered that they can often be awfully expensive. When you purchase a home, not only do you need to cover your down payment, but you'll also need to pay for a variety of closing costs. If you refinance, it's not unusual for thousands of dollars of closing costs to be rolled into your new loan balance. One closing costs that mortgage borrowers commonly ask about is the origination fee. So what are origination fees, and why are they charged?
What Are Origination Fees?
Basically, lenders charge origination fees to help cover their overhead. It takes a lot of people to close a mortgage loan, and the total closing costs cover a variety of services, including title, escrow, credit report, appraisal, home inspections, flood certification, tax certification, government recording, etc. Lenders will usually hire these services from third-party providers, but they also need in-house underwriters, processors, loan officers, and funders to complete the loan as well. Origination fees help cover these in-house services.
Origination fees also help cover charges for certain interest rates. Generally speaking, mortgage financing involves a trade-off between interest rate and closing costs. In other words, the lower the rate, the higher the costs. This is why it's important that when you shop for a mortgage, you shop costs in addition to rate.
If you have certain risk factors such as low credit scores, limited equity, or you're taking out cash, additional pricing adjustments may apply that could increase the cost of your mortgage. These extra pricing adjustments, called loan-level pricing adjustments, or LLPAs, are usually charged as part of the origination fee.
If your mortgage quote includes a very expensive origination fee, you might consider taking a slightly higher interest rate and letting the lender absorb all or part of the origination fee for you. As we already mentioned, the trade-off with mortgage financing is rate versus costs. If the costs of the loan are very high, you may be able to offset them with a slightly higher interest rate.
Once you've completed a mortgage application with a lender, federal law requires that they send you a Good Faith Estimate within three business days. If the lender is charging an origination fee, it will be disclosed at the top of page 2 of the Good Faith Estimate.
Origination Fees Are Often Negotiable
Because origination fees are charged by the lender and help cover their overhead, you may have a little bit of negotiating room to get them reduced. The best time to ask about this is at the end of the loan process right before closing. Lenders don't make money on your loan until it funds, so once you reach closing they are very motivated to get it done.
Though there's no guarantee they will reduce your origination fee, it doesn't hurt to ask if it can save you a few bucks.
What Are Origination Fees?
Basically, lenders charge origination fees to help cover their overhead. It takes a lot of people to close a mortgage loan, and the total closing costs cover a variety of services, including title, escrow, credit report, appraisal, home inspections, flood certification, tax certification, government recording, etc. Lenders will usually hire these services from third-party providers, but they also need in-house underwriters, processors, loan officers, and funders to complete the loan as well. Origination fees help cover these in-house services.
Origination fees also help cover charges for certain interest rates. Generally speaking, mortgage financing involves a trade-off between interest rate and closing costs. In other words, the lower the rate, the higher the costs. This is why it's important that when you shop for a mortgage, you shop costs in addition to rate.
If you have certain risk factors such as low credit scores, limited equity, or you're taking out cash, additional pricing adjustments may apply that could increase the cost of your mortgage. These extra pricing adjustments, called loan-level pricing adjustments, or LLPAs, are usually charged as part of the origination fee.
If your mortgage quote includes a very expensive origination fee, you might consider taking a slightly higher interest rate and letting the lender absorb all or part of the origination fee for you. As we already mentioned, the trade-off with mortgage financing is rate versus costs. If the costs of the loan are very high, you may be able to offset them with a slightly higher interest rate.
Once you've completed a mortgage application with a lender, federal law requires that they send you a Good Faith Estimate within three business days. If the lender is charging an origination fee, it will be disclosed at the top of page 2 of the Good Faith Estimate.
Origination Fees Are Often Negotiable
Because origination fees are charged by the lender and help cover their overhead, you may have a little bit of negotiating room to get them reduced. The best time to ask about this is at the end of the loan process right before closing. Lenders don't make money on your loan until it funds, so once you reach closing they are very motivated to get it done.
Though there's no guarantee they will reduce your origination fee, it doesn't hurt to ask if it can save you a few bucks.
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