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.

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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.

What, though, are all these line items on the “Good Faith Estimate”. Of course, your lender will be able to explain all of them. But perhaps you want to verify wheat you’ve been told. Or you just need a bit more explanation. Maybe you’re just shy about asking. (So many of us feel we should be knowledgeable about everything and it’s just not possible. NEVER refrain from asking questions. A professional, conscientious lender, agent, attorney, inspector will welcome being able to answer you.)

All that having been said, what are those danged charges? Follows is a partial list of some of the charges you may find when you buy a house. These are the costs that are generally considered charged to arrange the loan itself. There are other costs regarding taxes, insurance, revenue stamps and attorney fees that will be addressed in subsequent posts.

[NOTE: Legitimate charges can vary by region, the type of loan and the lender. When in doubt the reason for a cost, ask]

Origination Fee: The lender charges this to cover the cost associated with setting up the mortgage. Often it will be expressed as “1 point, ½ point, 1.5 point, etc.,”. A point equals 1% of the amount financed.

Loan Discount Fee: This is a charge paid if you decide to may extra for a reduced interest rate. Doing so is not always a good idea as you need to weigh whether the cost of the discount fee (again, usually expressed in terms of ‘points’) is made up by the reduction in monthly payments. Ask your lender to calculate the savings and how long you’d need to stay in the house for the discount fee is ‘paid for’.)

Appraisal Fee: The appraisal is required by the lender to ensure the property is worth what is being loaned. This is one fee the lender will generally require in advance.

Credit Report: The lender requires this in order to make sure YOU are worth what they’re lending. It will show your payment history, total outstanding loans, open lines of credit, etc., this lender will also probably require this up front at the start of the application process.

Application Fee: Strictly a fee charged by a lender and will vary widely depending on the lender. Some lenders don’t charge on at all.

Commitment Fee: Another lender fee. Varies greatly lender to lender.

Document Fee: See previous two items.

Flood Certification Fee:  Covers cost to evaluate whether property is in a flood plain and whether flood insurance will be required. ]]> http://caseydurango.com/2008/09/25/what-is-a-point-and-why-is-my-banking-charging-me-one/feed/ 0