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Video — What Are Loan Origination Fees?

37.5 seconds
Intimidated by mortgage loan terms and the list of fees? This short explainer video will help you get a handle on all of it.

While a mortgage involves borrowing money for a home, there can be quite a few items and fees in the stack of papers. "Loan origination" -- the process of documenting and evaluating your loan application -- is not free.

The "loan application fee" is one of the key components to understand. This fee generally covers:

The lenders costs to verify, evaluate and underwrite the loan.

This fee also pays for appraisal of the property — a professional valuation for the lender (not for the buyer.)

Fees to "pull" your credit history.

Other surcharges; ask the lender for a detailed list.

Loan application fees are generally non-refundable.

Mortgage Origination Fees: Stuff To Know

Most of the time, if a mortgage really has no origination fees, you'll pay more in interest over the life of the loan. A lender must find a way to make money. This could cost you tens of thousands of dollars over the life of the mortgage, depending on how long it takes you to pay off the loan. Even though you save money now, it could end up costing you a lot more in the long run.

If the interest rate isn't higher, it's likely that the lender is just calling the fee something else, like an underwriting or processing fee, even though it's the same thing. Most of the time, this is what the origination fee is for, so it's the same thing.

Other fees add up

When buying or refinancing a home, it's important to know that there are different times when a fee can be charged. Most mortgage fees that don't have to do with the interest rate you get are closing costs, but there are others. Let's look at each of them.

  • Rate lock: When you lock your rate at a certain level, your lender has to make sure that interest rates won't go up soon. A rate lock fee is what you pay for the right to do this. The rate lock will cost less if it is for a shorter amount of time.
  • Commitment fees: A lender has to put money aside for a loan before they give it out. They charge a commitment fee in exchange for guaranteeing the loan at some point in the future. This is a way to protect yourself in case the market changes. This lets the client get the money as long as it was approved and they close.
  • Underwriting or processing fees: If you see an underwriting or processing fee instead of an origination fee, it's a disguised origination fee. It's the fee the lender charges to look over any paperwork you give them and make sure you qualify for the loan.

Higher rates of interest

As we've already said, if there really is no origination fee – and for the purposes of this discussion, let's include fees that serve the same purpose but go by a different name in that category – the lender is likely to make up for it by charging you a higher interest rate to make more money on the back end of the loan.

Let's look at an example of a 30-year fixed mortgage on that $300,000 home to help you understand how this works. It's also helpful to know that points are often used to talk about mortgage closing costs. One point is the same as 1% of the amount of the loan.

20% Down, 3.75%

Your loan amount would be $250,000 with a 20% down payment. First, let's look at a rate with one point of closing costs. In this hypothetical situation, you might be able to get a rate of 3.75% if you pay one point at closing. With a payment of $1,157.79 per month, you would pay $2,500 up front and $166,804 in interest over the life of the loan.

20% Down, 4.5%

Now, let's look at the same $250,000 loan with no points paid. Say that rate was 4.5 percent. Your monthly payment goes up to $1,266.71, and you pay interest of $206,016.76. In the second case, you save $2,500 right away, but you end up paying more than $39,000 more in interest.

When you choose a higher monthly payment, you should also be aware that your debt-to-income ratio (DTI) will go up because you'll be spending more each month to pay off your debts. This could make it harder for you to get loans in the future because DTI is a key metric that lenders use.

You don't want to take on a monthly payment that is so high that it will make it hard for you to make money decisions in the future. If you choose a loan with no origination fee, it's likely that the interest rate will be higher, which will make your monthly payment more. This could make your DTI go up a lot.

Fees, Fees, Fees

When lenders talk to you about their fees, or lack of fees, it's important to find out how much you'll pay over the life of the loan and weigh the pros and cons of a mortgage with no origination fee. The interest rate is one quick way to compare things.

When you look around for different interest rates, you'll see two of them. The first is the interest rate, which is used to figure out how much you pay each month. The second one, which will be higher, is called the annual percentage rate, or APR. This is your interest rate, taking into account the costs of closing. When looking at different loan options, the APR will always give you a better idea.

Cathy Hills
Content Associate
January 27, 2023
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