When you apply for a mortgage, you may notice several fees are included in your total cost of borrowing. While some third-party fees, such as those for appraisals, credit reports, or title insurance, are charged no matter where you get your mortgage, there’s one fee that can vary or not be charged at all: the loan origination fee.
What is loan origination, anyway?
Before we dive into the fee itself, let’s take a look at what loan origination is in the first place.
Simply put, loan origination is the multi-step process of getting a home loan. The process begins when you submit your financial information to a bank, broker, or lender to obtain financing for the purchase or refinance of real estate. The process ends when your loan is funded, and the funds are distributed.
In other words, loan origination is how a new mortgage is created.
Why some lenders charge origination fees — and why they shouldn’t
In the late 1970s, many non-banks and brokers began to compete with large banks to originate and service mortgages, the process of opening, billing, and collecting mortgage payments.
Some lenders began charging origination fees as a way to get paid upfront for processing a new loan application — and many still do today. This fee is used to make lenders more money and turn a higher profit per loan. But, the fee is just one way lenders are compensated.
How to spot origination fees
To find or compare loan origination charges, take a look at your Loan Estimate (LE). The LE is the three-page form that explains your total cost of borrowing. You should receive one from each mortgage lender after providing your personal and financial documents.
Origination fees are listed on page 2, section A, which looks like this:
The Loan Estimate displayed above is for illustrative purposes only
If there’s no origination fee, don’t assume that you have a no-closing-cost mortgage, or that your mortgage is free of costs.
Lenders may try to compensate for not charging an origination fee by charging other fees, which will be listed on your Loan Estimate in the same section. These may be called different names such as Application Fee, Administration Fee, Processing Fee, Underwriting Fee, or Commission. But if they appear in this section, they are lender fees.
Make sure to ask about each fee that appears on your Loan Estimate, why they are being charged, and which third-parties will be paid.
Some common unavoidable fees, charged by most lenders, include:
- Credit report
- Wire transfer
- Tax service
- Flood certification
- Title insurance
- Escrow/signing fee
- Courier fee
What is an origination point
The origination fee may also be referred to as an origination “point.”
A point is simply mortgage jargon to express a percent of your loan amount. For example, 1 point equals 1% of the total loan, a half point equals 0.50%, and so on. On Wall Street, this terminology is much more common and points are broken down into even smaller increments known as basis points, where 100 basis points would equal 1%, 50 basis points (or bps) would equal .50%, and so on.
Origination points are not the same as discount points
You may notice an additional fee charged on your loan estimate, which closely resembles an origination fee.
Called a “discount point” or “discount fee,” it is also a prepaid fee on your loan. But a discount point is different from the loan origination point in Section A because it is charged with the sole purpose of reducing or “buying down,” your interest rate
You will only see a discount fee on your loan estimate if your loan provider has indicated that it is charging you an upfront fee to lower the lifetime interest of your loan. Whether you should pay discount points requires careful consideration and is dependent on your situation.
How to spot discount fees
You will only see a discount fee on your loan estimate if your loan provider has indicated that it is charging you an upfront fee to lower the lifetime interest of your loan.
For example, a discount fee of 0.625% charged at closing may lower your loan interest rate by 0.125%.
In this scenario, reducing the interest rate on a loan of $400,000 by 0.125% would cost $2,500 in discount points. ($400,000 x 0.00625 = $2,500)
Whether you should pay discount points requires careful consideration. For example, if you plan to stay in your home (without refinancing) for a long time, paying discount points to reduce your mortgage payments could be worth the expense.
But in many cases, you should be able to lock-in a great rate based on market conditions without paying any additional discount fees.
To see if paying discount points works for your situation, try our interactive tool.
The high cost of origination fees
Though 1% of anything seems small, the amount it represents in the context of your mortgage loan is indeed significant.
For example, a 1% origination fee on a $300,000 mortgage would result in an additional cost of $3,000 on top of your loan.
Don’t settle for a lender who charges origination fees
Both banks and non-bank originators have been extremely slow to adopt the technology and processes that could cut significant costs to borrowers and make it easier for you to get a mortgage.
At Better Mortgage, we don’t think that’s your problem to bear. You shouldn’t have to pay a premium to cover the inefficient and unfair way lenders do business- so we don’t charge them.
Vishal Garg, the founder and CEO of Better.com, intentionally started Better Mortgage to be, well, better than the other lenders. “The reason we do not charge origination fees is because we believe these fees are simply a transaction tax passed to you and used to pay various commissioned mortgage brokers.
And, such fees are rarely disclosed in an easy to understand way. While most lenders have some costs related to processing mortgages, that is usually covered by the premium or interest rate they collect on the loan.
You don’t benefit from additional services, quality, or features when you are charged origination fees on a loan versus a loan with no origination fees. And asking you to pay your hard earned money for nothing doesn’t make much sense to us.
If it doesn’t make sense to us, we shouldn’t do it — or ask you to either.”
Get a Better Mortgage experience
We knew mortgage lending could be better. That’s why Better Mortgage took the pioneering steps to bring technology and innovation to the mortgage industry. As a result, we’ve been able to cut costs, streamline the process, and ditch those unnecessary fees.
We never charge origination fees, application fees, or underwriting fees, and our loan officers don’t earn commissions. Instead, we get paid a one-time fee by our investors when they purchase the loan. We feel this is a better way of doing business because our borrowers deserve, well, better.
This publication is designed to provide general information. It is not intended to provide, and should not be relied upon, for tax, legal or other financial advice.