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How to reduce mortgage Origination Fees

How to reduce mortgage Origination Fees

Interest rates are always an important part of any home loan agreement but it is important to stay aware of the impact of home loan origination fees. These are usually charged upfront and getting them reduced (or even waived) can mean you can afford that new item of furniture, a home upgrade, or a much-needed redecoration.

 

What is a Loan Origination Fee and Why Is It Charged?

Mortgage lenders will usually charge you for setting up your home loan. These charges will include the stages of your loan application including all of the fees associated with underwriting and processing the paperwork for your loan. Some lenders will bundle all these things into a single charge whereas others will itemize them so you can see exactly what you are paying for. Some lenders will offer ‘points’; this is a charge that you can choose to add on and often give benefits like a reduction in your interest rate.

 

What is a ‘Processing fee’?

There are several different functions and tasks that a lender must complete to close your loan. The items that are commonly included in the ‘processing fee’ are:
• Collecting, checking, and organizing your documentation.
• Income analysis – the lender will look at all forms of income from paid or self-employment, any income from rental or stocks and shares, and any deductions made at the source.
• Conducting due diligence by contacting employers, the IRS, and other organizations to verify that all the information provided is correct.
• Checking that your loan application can be sold to investors, or that you can access certain government house buying programs.

 

Checking your fees

The Consumer Financial Protection Bureau will provide a 3-page Loan Estimate which will show you all the details concerning your loan. Make sure you receive this from your lender as this is what makes the loan offer and conditions official. The summary will include things like closing costs, home loan origination fees, interest, and how much your monthly repayment will be.

 

How to Cut Down on Home Loan Origination Fees

Most of us are not keen on paying thousands of dollars to take out a loan so we’ve put together some options that can help you reduce your loan origination fees.

 

Compare different lenders

Different lenders have different charges so it is well worth shopping around. Consider asking for quotes from a minimum of three different lenders. You may find they call the ‘origination charge’ something else so clarify this at the time and focus on the amount you will need to pay if you decide to go with them for your mortgage.

 

Pay Up Front

The best way to keep your costs down is to pay up at the outset. Although it can be painful parting with your hard-earned cash all in one lump it may mean that you get access to better interest rates in the long term. You will also know exactly what you need to pay because if you don’t pay upfront the costs will be hidden inside the main loan repayments. Be wary of lenders offering ‘no-cost’ loans – these do not exist, it is just a fancy way of including the fee in the loan. No one ever provides a loan for free.

 

Get Lender Credits

You can opt to gain access to more funds by accepting a higher rate of interest. If you go down this route it is best to choose a lender who will show you exactly what your options are whether or not you choose to use negative points and get the credits. If you have a higher interest rate you will pay more over the life of the loan so it only really makes strategic sense if you intend to move on quickly or refinance and clear the loan.

Be prepared to negotiate

There is no harm in asking if your lender will consider waiving the origination fees. They may well refuse but it is worth asking if it means you end up saving what could be thousands of dollars. If your loan is large, you have a good regular income and an excellent credit rating you are more likely to get a positive response from your mortgage company.

Ask for Gifts

Many buyers have relatives who are happy to help out financially so do ask if you can use financial gifts to pay an origination loan fee. If you go down this route a lender will often insist that the gift is confirmed in writing and ideally should come from a close family member.

Ask the Seller for Concessions

If your home loan is covering a purchase you could consider asking the seller to pay some of your costs. This works well in a buyer’s market but even if it is a seller’s market you could reduce your offer price if they will agree to cover part of your origination costs.

What can you expect to pay?

How much you will finally end up paying in origination fees will depend on several factors: For larger loans, the fees are always relatively lower than for smaller ones. This is because both types of loans take the same amount of work to set up regardless of the loan size. Processing fees tend to come in between 0.5-2% so a larger loan would be at the bottom end of the range, a smaller one towards the higher. When you look at the fees you’ll pay take account of other things like interest rates and so on.

Using discount points

Originating fees pay your lender for closing your loan; discount points act to lower the rate of interest you pay on the loan. The term ‘points’ is usually used to indicate 1% of your loan. So always be sure what you are talking about and ask the lender to clarify if something is a discount point or an origination charge.

Closing Costs

In addition to your home loan origination fee, you will be expected to pay closing costs as detailed in your Loan Estimate. Some of these charges relate to third-party services but if your lender has arranged these they are included in the total. Some vendors charge more than others so check out various home loan companies before you make your choice because the difference in closing costs can be in the region of hundreds of dollars. In general, you could expect your closing costs to include origination fees and all the other charges to cost around 2-5% of your total loan.

 

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