Amy Paterson from nbkc bank walks us through the mortgage origination fee
What is an origination fee?
So, what is an origination fee exactly? In the world of superheroes, everyone has an origin story and guess what? The mortgage origination fee is the origin story of your mortgage. Simply put, the origination fee is the cost you’ll pay to bring your mortgage to life. Early on, your potential lender begins the process of making sure they want to loan money to you. This process includes handling paperwork, reviewing your credit and history, etc. Simply put, they are spending their time to ensure you are creditworthy. The origination fee covers that effort.
How much does the average origination fee cost?
Just how much is their time worth? The standard mortgage origination fee is between .5 and 1% of your purchase price. This means you’ll pay about $1,000 on the low end (.5%) for a $200,000 house or $2,000 on the high end (1%) for the same property.
Keep in mind, these are the average fees and you’ll want to pay attention to what your lender proposes to make sure it’s reasonable. We also advise taking the time to look at other factors related to the overall mortgage before you sign any paperwork. Just because you are offered a low mortgage origination fee doesn’t mean it is automatically your cheapest mortgage option.
Keep in mind all costs included in your mortgage
Here’s an example – if you only pay attention to the mortgage origination fee, you may feel pretty excited if a lender offers to waive that fee completely. After all, you’re getting a great deal, right? Not necessarily! If that same lender waives the up-front fee but adds a full percentage point to your interest rate, you could end up spending a lot more in the long run. Take the time to ask about ALL the fees and work with your team of experts to make sure you understand the overall cost you’ll be paying for the loan.
A mortgage origination fee helps lenders cover costs
The mortgage origination fee has always been a way for lenders to cover their overhead and the time it takes to set up your loan. In fact, you’ll typically see this with any type of loan, not just one you’re securing for a mortgage. To understand why it’s important, here are some of the things this charge covers:
Overhead
Simply put, this fee is a cost that helps support the overhead associated with the fixed costs of running a business. Once the loan is established, you won’t be paying this charge again so it’s one way of capturing a payment that goes to the lender’s bottom line.
Time
Believe it or not, there is a significant amount of time that goes into your loan application. Because a home loan means there’s a lot of money on the line, any lender is going to invest enough time to be confident you can pay it back. Compiling your documentation, reviewing your request and analyzing your paperwork as well as ensuring your application meets legal requirements are all part of the process your lender will complete.
Commission
Your loan originator is usually the person responsible to “sell” you a loan. Unlike a door to door salesman, you aren’t being sold something you have no interest in. But just because you’re interested doesn’t mean you will sign with this particular lender. The loan origination officer has to work within their parameters to make sure you sign with them. And when they do, this fee likely covers their commission.
Do I have to pay an origination fee?
When asking “what is an origination fee and why do I have to pay it,” keep in mind that a mortgage origination fee isn’t just junk. It actually covers a number of people who will be working on your loan and will be something you can plan for in advance. Remember, just because a lender offers to waive a loan origination fee doesn’t mean it will save you money in the long run. So be ready to search out the best deal but don’t try to get out of the fee altogether. It’s part of the home-buying process when you’re using a lender.
You may be able to negotiate it
That being said, accepting this fee doesn’t mean you shouldn’t negotiate. Loan fees are absolutely negotiable, especially if you’re a desirable client. A lender will typically want to work with you if you have great credit and are taking out a large loan, so if you’re in that position, take advantage of it.
Negotiating with the lender
The best way to negotiate is to ask the lender if they can do any better on the mortgage origination fee. If they have the flexibility to make an adjustment and want to have you as a client, you may be able to save a little money.
Negotiating with the seller
Additionally, you can negotiate a concession with the seller in many cases. If the seller is motivated to close the deal, they may be willing to pay a certain amount towards your closing costs – which can be used to pay the origination fee.
Talk to multiple lenders
Another way to improve your position is to take a look at multiple lenders. Many lenders offer different options at varying times and one may be willing to offer you something better depending on their circumstances. The key is to make sure you look at the big picture and the overall costs of the loan. Get the advice of your real estate agent and mortgage broker if it gets confusing to tell who’s offering the best price. With all of the factors that go into a loan, it’s easy to get lost (in fact, some lenders count on it!) so don’t be afraid to get some help as you consider all your options.
Get familiar with the term “points”
As you consider different loans you may hear the term “points” in relation to saving you money. Although mortgage origination fees may use that word, it’s not the same as mortgage points that buy down your interest rate.
Let’s break that down and talk about a mortgage origination fee of 1%. In the real estate world, that origination fee is called one point. If it were 2%, the mortgage origination fee would be called two points. Points are a measurement in this scenario and it’s one point for each one percent.
Another time you’ll hear points is when you have the opportunity to buy down your interest rate. In this scenario, let’s say the lender has offered you a mortgage with a high percentage rate of 5%. You think you should be closer to 4%. The lender will agree to that if you “buy” down the rate, utilizing what’s called points. These points are up-front costs you’ll pay at closing that will ensure a lower rate over the life of the loan.
A few pointers (pun intended) on points
Here are a few things to keep in mind when you think about using points to “buy” a lower interest rate. First, keep it to yourself – at least initially. If you start the conversation with a mortgage lender asking how you can buy down your rate, you may be inadvertently sending a message that you expect to see a high rate and you’re willing to pay for a lower one. Wait until you’ve been given the details for any mortgage before you mention your willingness to pay something more up front.
The second thing to keep in mind is what makes sense for YOU. Don’t decide you need a certain interest rate to be happy, especially if it’s an arbitrary number. Instead, take into consideration your individual finances, the length of time you expect to be in the home and the actual numbers of buying a lower interest rate vs. paying less up front. If you need help running both scenarios, reach out to your real estate agent or mortgage broker and ask them to walk you through both options. There’s no shame in learning about this process, especially when it’s your money on the line!
Who handles your loan?
There will be a lot of different players when it comes to your loan and the loan originator is just one of them. Don’t stress about all the people you’ll have to answer to during this process. Instead, let’s take a look at who you may be working with and what their specific roles are:
The Loan Officer or Loan Originator
This person will discuss your home buying goals, like how much house you plan to buy. They’ll help you with the pre-approval process, which means all the paperwork that proves your identity and confirms what assets you have. Once you’re pre-approved, the application starts – generating more paperwork to compile and review! After that, you’ll be moving those files to processing.
Processing Team
You’ll likely work with different individuals here, although you may have one key contact. This team looks through all the details up front to make sure signatures are in place, all the pieces are in order and that you’re ready to move to the next step – underwriting.
Underwriter
The underwriter is the person (or team of people) that takes a look at everything they’ve been sent with a critical eye towards detail. If you had a lot of money deposited into your account with no explanation, your underwriter will find it. If you are missing paychecks or didn’t submit a legible W2, expect to get an email or call. The underwriter’s job is verification – that all the paperwork is submitted, reviewed, accurate and confirms the assumption that you can afford to take on this loan. In addition to confirming your information, the underwriter will work to make sure they are meeting federal and mortgage specific guidelines. Fannie Mae loans, for example, require certain boxes are checked and the underwriter will be the one to do that.
Closing
The closing process means you’re coming down the home stretch. Typically, at this point, you’ll be working with the title company (that’s already been chosen) and a closing attorney. The title company will be sending you files that list every debit and credit associated with the transaction and will be updating it as needed. When you get the “clear to close” you will have all the final numbers and be ready to sign. The signing usually takes place at the title company office, although in some cases you may use a mobile closer. A mobile closer just means someone that can come to your location and bring the paperwork to you.
After those steps, it’s time to get those keys and rent your moving truck! From origin story to the first chapter of your home buying life, we’re here to help you get the information you need to feel comfortable every step of the way.
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