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What Are Origination Fees and Origination Points?
Mortgage origination fees and points typically make up a sizable portion of the money you’ll pay in closing costs, but they’re only one of many line items you’ll pay at closing. Origination points compensate the lender for the work they do when processing, evaluating and approving the loan. The difference between origination fees vs points is really just in the way the fee’s calculated. Some lenders talk about “points” in reference to origination fees. It means that the fee’s equal to one point — or one percentage point of the total loan amount.
What Is a Loan Origination Fee?
A good definition of a loan origination fee is “the charges and commissions that pay for services like funding the loan, underwriting and administrating it.” Usually called “discount points or discount fees” when exactly 1 percent of the loan is charged to the borrower, loan origination charges are similar to a lender compensation charge and can range from 0.5 percent to 1 percent of the loan amount.
It’s important to know that mortgage loan origination fees are frequently negotiable. Although part of closing costs, origination charges and origination fees are not the only expenses you’ll encounter at closing. But they are among the few that you can directly negotiate with the lender. When you’re wondering “how much are loan origination fees going to cost me?” remember to explore your options with the lenders to get the best deal you can.
How Much Are Origination Fees on Average?
Loan origination charges usually run about one-half to one percent of the total cost of the loan. On a $250,000 mortgage, you’re going to pay an origination fee between $1,250 to $2,500 or 0.5 to 1.0 percent/point to the lender for the loan.
Depending on the type of loan, you may have the option of folding loan origination fees and points into the total amount of the loan. This affects you in two ways. First, you’ll pay less out of pocket at closing. And secondly, your total loan amount will be higher.
VA loan origination fees have rules that max out the allowable amount charged to 1 percent of the loan. And FHA origination fees also are capped by the Department of Housing and Urban Development (HUD) at one percent as well.
A higher mortgage origination fee will frequently translate into a lower interest rate on your monthly mortgage payment. So if you can pay upfront for points at closing, you may be able to save a lot over the life of the loan.
Mortgage Lenders With No Origination Fee
When market conditions are bad for lenders, they may have to work harder to earn their homebuyer’s business. Loan providers may charge no fee for their loan origination services — and some are even offering a cash award that can be applied towards closing costs — in addition to waiving the origination fees or points. Loan origination fee calculators can be useful tools when considering your closing costs.
Typically however, with average loan origination fees hovering around 1 percent, banks that do offer this no-fee service to make up that lost income elsewhere in the loan. Be sure to look carefully at the overall cost of borrowing when considering lender origination fees and mortgage offers. You may find you’re being charged a higher overall annual percentage rate (APR) vs. banks that require a typical home loan origination fee.
While your reviewing mortgage offers and origination fee expenses, be sure to let your American Family Insurance agent know that you’re planning to move in the near-future. You’ll get a customized quote for your new home and will find greater peace of mind knowing that everything you’ve worked so hard for is well protected.