What is an adjustable-rate mortgage and how do they work?
Adjustable-rate mortgages come with variable interest rates that tend to start low but change over time. How do they work, and when are they worth it?
Emily Moore
Buying a home is one of the most expensive purchases you’ll make in your lifetime. And it will cost more than just the price of the home itself. There are dozens of fees associated with your home purchase, including the mortgage origination fee.
Before you shop for a mortgage lender, it’s important to understand how origination fees work, who pays for them and how much you can expect to pay.
Origination fees pay for the services provided by your mortgage lender, including administrative tasks, paperwork and the underwriting process. They may also include other charges, such as mortgage points.
When you purchase a home, origination fees are usually included in the closing costs, which you can find in your loan estimate statement. The loan estimate may also break down each service included with the origination fee so you can see exactly what you’re paying for.
Origination fees are typically between 0.5% and 1% of your total loan amount.
» MORE: How much are closing costs?
An origination fee is a flat fee charged for a variety of services that the lender provides, including:
An origination fee is typically a flat fee that equates to a percentage of your total loan. The Truth in Lending Act helps limit origination fees charged by lenders.
Most lenders now charge between 0.5% and 1% of the loan amount. This means that an origination fee would be around $2,000 to $4,000 for a $400,000 mortgage.
In addition to the flat fee, if you pay for mortgage points to lower your interest rate, this may also be listed as part of the origination fee. Points are prepaid interest on your mortgage. One point typically costs 1% of the loan amount and is worth a 0.25% interest rate reduction on your loan.
If you don’t see any origination fee on your loan estimate or closing disclosure, your lender may have just called it something else, such as a “processing fee.” You are still paying the fee; it is just called a different name.
There are ways to avoid paying origination fees on your loan, and some lenders even advertise “no origination fees” for either purchasing a new home or refinancing an existing mortgage. But while you can avoid paying an origination fee at closing, the lender will make money on your loan in other ways. And sidestepping an origination fee may end up costing you more in the long run.
Lenders may charge high interest to make up for no origination fees. Compare fees and rates before you sign.
If you want to avoid paying origination fees, you can ask for a lender credit, which is essentially a negative mortgage point. But this results in a higher interest rate, which may cost you more over the life of the loan. Even if you’re not using lender credits, the same fundamental tactic may be used by lenders that technically don’t charge origination fees.
Jay Sobo, founder and CEO of Liberty Financing, advises borrowers to be careful with no-origination-fee loans.
“These fees can also be baked into the rate and cost of the loan,” said Sobo. “This may avoid paying origination fees upfront but could increase the total cost over the life of the loan. While mortgage brokers are limited to 2.75% in total fees charged as origination, lenders are permitted to collect well over 3% built into the backend of the loan.”
When you shop for a mortgage lender, be sure to compare the interest rate against any promises of low or no fees.
Another way to avoid paying an origination fee is to negotiate for the seller to pay closing costs. Some sellers may be willing to cover closing costs as an incentive to close the deal, especially if it’s a slow market.
While your origination fee is one of the larger mortgage fees, there are other fees you should be aware of that can add up to higher closing costs.
Points paid on a mortgage help you lower your interest rate. Sometimes the fees paid for these points are referred to as “origination fees,” but in reality, they are simply prepaid interest. In contrast, an origination fee is paid to the lender for its loan services.
Yes, most loan refinances charge an origination fee. These fees can range from 0.5% to 1% of the total loan balance being refinanced.
Yes, an origination fee is a one-time fee that is charged for your lender’s services when buying a home or refinancing your mortgage.
Yes, mortgage origination fees can be tax deductible. There are several criteria to qualify for a full deduction, but most taxpayers can deduct origination fees as mortgage interest on their taxes as long as the mortgage is for a primary or secondary home purchase. As with all tax matters, it’s best to consult with a licensed tax professional to see what you qualify for.
An origination fee is charged by lenders for the services they provide, and the fee is assessed at closing. Origination fees can be waived, but that usually results in a higher interest rate, which can end up costing a borrower more money in the long run. Your best bet for avoiding a mortgage origination fee is to have the home seller pay for your closing costs.
No matter who pays for the fees associated with your home purchase, make sure to understand all the fees assessed on your closing disclosure before signing on the dotted line.
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