A mortgage origination fee is what lenders charge you for setting up a mortgage loan. Mortgage origination fees can include underwriting fees, administrative fees, and loan processing fees, to mention a few. The good news is there are ways to negotiate and even avoid some mortgage origination fees.
A mortgage origination fee can increase the cost of your mortgage by 0.5% to 1.5%. On a $335K mortgage, that’s $1,675 to $5,025. That’s a chunk of change. However, many homeowners don’t really know what they are paying for when it comes to a mortgage origination fee. Click here if you want to go straight to our 9 strategies to reduce mortgage origination costs.
Buying real estate involves closing costs. In his book “Homes and Other Black Holes” Dave Barry said it best:
“Essentially what you must do in the ritual closing ceremony is to go into a small room and write large checks to total strangers. According to tradition, anyone may ask you for a check, for any amount and you may not refuse.”
The closing costs he refers to include mortgage origination fees. To understand what they cover, how much they cost, and ways to eliminate them, you need to first understand how the mortgage industry works.
History of mortgage origination fees
In the distant past, banks made money the old-fashioned way. Individuals deposited money with the bank. The bank paid them a rate of interest on their savings account, then lent the money to other people and businesses, charging them a higher rate of interest. Mortgages were a popular product. The bank made money on the spread, the difference between what they were paying depositors and collecting from borrowers. These rates were often fixed. The bank assumed the risk the borrower might default on the mortgage, but they had protection because the home was the collateral. Banks held the mortgages for long periods of time.
Several decades ago, the banks started to get out of the business of holding mortgage loans until maturity. They would make mortgage loans that met specific standards, then sell the loans to a third party, often the Federal National Mortgage Association (FNMA or Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). People They would repackage these mortgages as securities on the secondary market, to investors seeking income. Institutions like pension funds were major buyers.
Because banks were no longer in the business of making money from the interest rates spread on the loan, they needed another way to make the business profitable. That’s where we get mortgage origination fees.
What is a mortgage origination fee?
In simple terms, it’s a fee charged for providing you with a mortgage. It varies by institution or provider. When a bank grants you a mortgage, they need to do their homework first. This can involve verifying your income and assets. They need to confirm the property can be mortgaged. Is it safe? Is the purchase price appropriate for the property or has the property been overvalued? This involves an appraisal, which is often done by considering comparable properties in the same area. They need to collect documentation and process the paperwork. They put a price tag on this process, often in the range of 0.5% to 1.5% of the value of the mortgage. It’s a fee, so there’s the potential for negotiation. FYI: The appraisal is an example of a fixed charge. More on that later.
As you can see in the table below, current mortgage origination fees are low compared to the 90s.
You might consider it’s money well spent to get the process moving along swiftly, so why negotiate? Consider the analogy of buying a bottle of wine in a restaurant. The first bottle you order costs $50.00. The wine steward presents the bottle, removes the cork, offers you a taste and serves the wine. You are expected to tip 15%, which is $7.50. The second bottle you order is a $500.00 bottle. (You were feeling in a good mood.) The wine steward goes through the exact same procedure. You are again expected to tip 15%, which is $75.00! What did they do differently?
Therein lies the problem of a fee based on a percentage. The verification and paperwork process should be identical on a $ 200,000 mortgage and a $ 2,000,000 mortgage, but the fees can be 10x higher!
The loan estimate and mortgage origination fees
The government believes in full disclosure. You will get the Loan Estimate document, a three page report. (1) Section A is Closing Cost Details showing the Origination Costs and a breakdown. Since Section B shows fixed charges you can’t change, this implies the Origination Costs are negotiable. These Section A fees are sometimes called Lender Fees or “Junk Fees.”
Are lender fees unique to the mortgage business? No. You run across them with auto loans, and personal loans. Here’s where you can learn more about loan origination fees. You may have run across something similar when you decided to take advantage of a balance transfer offer, moving your credit card debt to another bank to take advantage of a lower interest rate can sometimes trigger a balance transfer fee, which is another type of loan origination fee.
Points on a mortgage
Another way lenders make money is through the points associated with the rate on your mortgage. One point equals one percent of the loan amount of the mortgage. For example, one point on a $ 200,000 mortgage would be $2,000. This would be considered a fee to be paid. If you accept the standard rate of interest, there might not be any points. However, if you prefer an interest rate that might be a quarter of a percent lower and are prepared to pay, the cost might be one point.
Where do mortgage brokers fit in?
Not everyone applies to a bank for their mortgage. Many people choose to work with a mortgage broker based on the logic they will act as an intermediary on your behalf to find the best type of mortgage product at the best rate for you.
Your real estate agent might have even volunteered a name. You might wonder if they are being paid for referring business. By law, they cannot be paid. The Real Estate Settlement and Procedure Act (RESPA) (2) expressly prohibits real estate agents from getting compensated by a mortgage professional.
How do mortgage brokers make their money? They are considered on the wholesale side of the business, bringing loans to lenders and getting compensated by them. They make money through the lender fees mentioned above, since they are doing the work qualifying the borrower.
Suppose the borrower agreed to pay a higher rate of interest? The mortgage broker might receive a cash rebate from the mortgage provider. It might sound like paying a higher rate is not in the borrower’s best interest, but this may provide an opportunity for the mortgage broker to absorb the lender costs and explain their mortgage product has “no origination costs.” (3)
Why would a person accept a higher rate of interest just to save a few thousand on the front end of the transaction? The buyer might not be intending to only hold the property for a short time, sell it and repay the mortgage. Beware of prepayment penalties.
What are loan originators?
Loan originators perform functions similar to banks, but usually don’t intend to hold the loans. They do the paperwork and fund the loan. Next, they sell the loan to an investor, getting money back to make more loans, repeating the process.
9 Strategies to reduce (or even eliminate) mortgage origination fees
We’ve established that lender costs are a major way the bank or mortgage broker makes money from each mortgage. Can these fees be eliminated? Since they are often negotiable, it’s worth trying. Here are nine strategies to consider.
1. Just ask
It’s worth a try. If you are a qualified borrower, the lender should be interested in making the loan and booking your business. They should be prepared to compete. Simply asking politely can initiate the negotiation process.
2. Do your homework
Many banks are ready to lend money. It’s what they do. Mortgage brokers may be representing additional institutions that don’t have branches all over the place. Research what rates are available. Talk with them, don’t just do an Internet search. FICO scores are also referred to as your credit rating. FYI: FICO stands for Fair Isaac Corporation. Although it’s been said applying for a loan several times will damage your credit score, FICO understands people shop around. FICO considers several inquiries made within 30 days as one inquiry. (4) Find the lender offering the best terms.
3. Approach community banks
These are often smaller institutions with far fewer branches than their multi-state competitors. They have a commitment to the community and usually make lending decisions through staff in the local area. They want to lend locally.
4. Check the quotes of new lenders in your area
New lenders may be willing to lower their fees to drum up some business. They have incurred costs, now they need to bring in revenue. They may be willing to negotiate on fees to win your business.
5. Try your current bank
Your bank wants a greater share of your wallet. Put another way, they want additional business relationships with you because it makes the relationship “stickier.” They way be willing to offer more attractive terms because you are already a customer. You are increasing the size of your relationship and your profitability to your bank.
6. Ask your lender to help out
The real estate market isn’t always a hot market. Some properties have been for sale longer than others. The length of time on the market is a number realtors can access. If the house has been for sale for a while or the seller wants a quick sale, they may be willing to pay these fees when closing costs are settled up.
7. Increase the size of the mortgage
See if you can wrap these additional closing costs into the total value of the loan. It’s not the smartest thing to do, but if cash is tight when you are buying your house, this might be an option.
8. Pay a higher interest rate on your loan
Earlier we learned mortgage brokers might receive a rebate from the lending institution if the borrower accepts a higher rate of interest. This may allow the mortgage broker to offer the loan with no lender fees or otherwise absorb them.
9. Get lenders to compete
Armed with your information, approach several banks in your area. Explain you are happy with the terms offered at another bank, but are looking to see if you can get a better deal. See what they say.
- Origination fees are a way for the lender to make money on the front end of the mortgage process.
- There are ways you might be able to reduce or eliminate these fees. It’s worth a try.
- Origination fees have become a profit center for many banks since they rarely hold mortgages to maturity. Many make their money on volume of loans written.
- Understanding how the business works is the first step towards lowering or eliminating these fees.
- You might be able to get origination fees removed if you are willing to have a mortgage with a higher rate of interest.
View Article Sources
- Mortgage origination services – CFPB
- Regulation X Real Estate Settlement Procedures Act – CFPB
- VA Originations Costs – Veteran AffaiRs
- Home Mortgage Points – IRS
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor” is available on Amazon. Bryce spent twenty years with a major financial services firm as a successful financial advisor. He has been published in 40+ metro market editions of American City Business Journals, Accountingweb, NAIFA’s Advisor Today, The Register, LifeHealthPro, Round the Table, the Financial Times site Financial Advisor IQ and Horsesmouth.com.