First-time homebuyers are stepping into a whole new real estate market. Besides the new kind of economic climate, one of the biggest factors is the terminology, which often comes as both jargon and just entirely new words. When it comes to interest rates, for example, there’s likely “origination fees” that come with them.
What Are Mortgage Origination Fees?
Put simply, origination fees when it comes to mortgage are the costs of the lender. This is what they spend on the creation and processing (“originating”) of a mortgage loan. For the most part, mortgage origination fees are usually referred to as “points.” They’re different from interest rates and closing costs. Originating fees are comprised of several ones, such as:
- Courier fees
- Document preparation fees
- Tax service processing fees
- Underwriting fees
How Does The Origination Fee Work?
As previously mentioned, this fee plays a key role in various miscellaneous lender costs. This includes, but is not limited to:
- Loan application processing
- Underwriting the loan
- Verifying borrower’s assets
- Verifying borrower’s income
- Verifying borrower’s job history
How Much Are Mortgage Origination Fees?
The actual cost depends on the lender at hand. The range is usually around 0.5 to 1 percent of the loan amount in total. Let’s look at a lender whose points charges are at 1 percent. A payment of $2,000 will be due when taking out a mortgage for $200,000.
It is not unusual to be able to “buy down” an interest rate through higher origination fees. The standard rate is for the mortgage rate to be lowered by 0.25 percent for every one point paid. An interest rate of 5 percent paid off with an extra point will mean a rate of 4.75 percent locked in for the future. If it seems like a lot of money in the beginning, the savings in the long run over the loan’s lifetime are considerable.
At Which Point Are Points Paid Out?
At the close of a mortgage, you must pay both the origination fee and closing costs at the same time. You’ll be quoted an estimate of the closing costs three days before your close. At that time, you’ll also need to make your down payment in full. Closing costs are typically due by the day of closing, but can sometimes be negotiated to be due a few days later.
Are Origination Fees Mandatory?
Yes, they pretty much are necessary and must be paid in order for a mortgage to push through. Lenders need to be able to at least make what they’re spending back somehow, even without points. This is usually through higher closing costs or interest rates higher than initial expectations.
That said, points can end up in the mortgage balance, so no more cash will need to be taken out upfront. However, the trade-off is that the monthly mortgage payment will go up a bit.
Conclusion
Mortgage origination fees, usually referred to as points, are the lender’s costs. Paying for this is mandatory as it involves the likes of document preparation fees, verification of various borrowers’ information as well as loan processing fees. Thankfully, you don’t have to be too confused about these expenses and rates with the right mortgage lender.
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