[This is a snippet of information about mortgages and lending. I've written previously about some of these details but this weekly installment will be on one aspect of the nuts and bolts - not to be confused with the "nuts and dolts" whose shaky lending decisions helped get us into this fine mess - of the borrowing process. If you have a particular topic or question, send it along]*
What is an “Origination Fee”?
In the simplest terms, this is money paid to get a lower interest rate. Some regions customarily quote this fee, some don’t.
An origination fee is essentially a loan discount – or ‘buy down’ – point and equals 1% of the amount borrowed (not of the purchase of the house). You can also pay a fraction of a point, but 1% is typical.
You don’t have to pay the fee, but you will probably pay a higher interest rate if you don’t. You’ll want to figure the up front cost of the point against the increased monthly payment of a higher interest rate.
If you’re going to be in your house more than about three years, it probably makes sense to pay the point.
If cash up front is an issue for you, going with the higher interest rate may make more sense.
If you can get the seller to pay your closing costs (not an uncommon occurrence) you can get the best of both worlds by agreeing to the point and getting the lower rate.
How are you to know what your closing costs and monthly payments will be so that you can make an informed decision? Ask for a “Good Faith Estimate“. More about that and other mortgage terms in future posts.
For now, take away from that:
- an origination fee is charged to get to “buy down” the interest rate
- a customary charge is 1% of the borrowed amount, but can vary
- whether ’tis wiser to pay the fee or not depends on your current needs and future plans.
And don’t feel like a goof if you don’t know all this already. Why on earth should you? Ask your lender. Ask your real estate agent. Ask you cousin who just went through all this. Never be afraid to ask.
_______________________________________________________________
If you have questions, comments or a good joke to share shoot me an email. I’m a full time Realtor®, I love what I do and would be thrilled to hear from you.
* Mortgage lending practices can vary from region to region, lender to lender, and can be affected by market conditions. Lending criteria can change, and have. Often. The information I provide is based on my experience in my area. So, again, ASK QUESTIONS.
{ 1 trackback }