If you've ever applied for a mortgage, you probably have already figured out that they can be quite expensive. If you're refinancing, it's not unusual to have thousands of dollars of closing costs rolled into your new loan balance. If you're purchasing, not only will you have to pay your down payment, but you'll also need to cover a good chunk of closing costs as well. One closing cost that borrowers commonly ask about is the origination fee. So what are origination fees? Why are they charged?
Why Origination Fees?
The reason lenders charge origination fees is to help cover their overhead. There are a lot of people involved in making a mortgage loan happen, which is why so many closing costs are charged to begin with. It takes third-party title representatives, escrow officers, government recording, credit reports, appraisers, tax certification, flood certification, home inspectors, etc. to get a mortgage loan done. Lenders also have in-house processors, underwriters, loan officers, and funders they need to pay for as well. These in-house services are usually covered by origination fees.
In addition to covering lender overhead, origination fees also commonly include charges for certain interest rates. In mortgage financing, the trade-off is always between rate and costs. In other words, the lower the rate the higher the cost. This is why it is important that you always shop for both rate and cost when shopping for a mortgage.
If your financial profile includes certain risk factors such as low credit scores, high loan-to-value, and/or you're cashing out equity, some additional pricing may kick in that could increase the cost of your mortgage. These pricing adjustments are called loan-level pricing adjustments, or LLPAs, and they 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.
After you complete your loan application, the lender is required to send you a Good Faith Estimate within three business days. Any origination fees that are charged 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 to help cover their overhead, they often can be negotiable. The best time to ask for a reduced origination fee is at the end of the loan process right before closing. Lenders don't get paid on the loan until the loan is completed, so once the loan is nearly done they are very motivated to finish it.
There's no guarantee they will say yes and reduce your origination fee, but it never hurts to ask.
Why Origination Fees?
The reason lenders charge origination fees is to help cover their overhead. There are a lot of people involved in making a mortgage loan happen, which is why so many closing costs are charged to begin with. It takes third-party title representatives, escrow officers, government recording, credit reports, appraisers, tax certification, flood certification, home inspectors, etc. to get a mortgage loan done. Lenders also have in-house processors, underwriters, loan officers, and funders they need to pay for as well. These in-house services are usually covered by origination fees.
In addition to covering lender overhead, origination fees also commonly include charges for certain interest rates. In mortgage financing, the trade-off is always between rate and costs. In other words, the lower the rate the higher the cost. This is why it is important that you always shop for both rate and cost when shopping for a mortgage.
If your financial profile includes certain risk factors such as low credit scores, high loan-to-value, and/or you're cashing out equity, some additional pricing may kick in that could increase the cost of your mortgage. These pricing adjustments are called loan-level pricing adjustments, or LLPAs, and they 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.
After you complete your loan application, the lender is required to send you a Good Faith Estimate within three business days. Any origination fees that are charged 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 to help cover their overhead, they often can be negotiable. The best time to ask for a reduced origination fee is at the end of the loan process right before closing. Lenders don't get paid on the loan until the loan is completed, so once the loan is nearly done they are very motivated to finish it.
There's no guarantee they will say yes and reduce your origination fee, but it never hurts to ask.
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