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?
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.
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 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.
Why 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.
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 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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