Buying your first home can be overwhelming, and all the costs and fees involved can be confusing. The down payment isn’t the only expenditure you’ll have when closing on a house; you’ll also have to pay closing costs, which could add up to 2 to 5 percent of the purchase price of the home.
Chief among these closing costs is the loan origination fee, which is charged as compensation for the research your lender has done on you to determine whether you would be a trustworthy borrower. With an understanding of the loan orientation fee, you can become a savvier homebuyer and a more knowledgeable borrower.
What is a loan origination fee?
The loan origination fee pays for the costs of originating the mortgage. Costs covered under the loan origination fee include:
- Calculations done to determine your mortgage rate
The loan origination fee is simply a cost meant to pay for the research your lender has done on you as a borrower. The loan origination fee is usually about 1 percent of the total home loan, but that can change depending on a number of factors.
Good Faith Estimate
To find out what your loan origination fee will be and how it will affect your total cost, check your good faith estimate. A GFE will give you a total loan estimate, broken down into estimates of individual costs. Mortgage lenders are required to give you a GFE within three business days of receiving your application for a loan.
A GFE is a useful tool for determining how the loan origination fee will affect your total loan cost. And your GFE will always provide an accurate estimate of the fee — it’s one of the costs that must remain the same price that was disclosed in the estimate.
Average Loan Origination Fee
The average loan origination fee can vary based upon the value of the house. Generally the loan origination fee is calculated as a percent of the total mortgage loan. So regardless of the amount of work put in by the mortgage broker, higher-value mortgage loans will typically have a higher loan origination fee than lower-value mortgage loans. That being said, the average loan origination fee should be about 1 percent of the total mortgage loan, whatever that loan might be.
Negotiation of Loan Origination Fee
The loan origination fee is not set in stone. It’s possible to negotiate the fee to a lower amount. If you have a good credit rating, then you should be able to negotiate with the lender and get the price lowered. You also could ask for a flat-rate loan-processing fee.
One possible way to avoid loan origination fees entirely is to request that the seller of the house pay the fee. If he is in a hurry to move, or wants to put the selling process behind him as quickly as possible, the seller might be willing to comply and pay the fee out of his own pocket.
Origination Fees as Tax Deductions
Depending on the terms of the mortgage, it is possible to use your loan origination fee as a tax deduction. If the fee is deductible, it can be deducted either the year the loan was first taken out or each year over the course of the loan.
What You Need to Know Before Paying a Loan Origination Fee
Before you start to discuss loan origination fees with your mortgage lender, you need to know a few basics about these fees. The first thing you should be aware of is that, like other closing costs, loan origination fees must be paid in full at the same time as the down payment. It’s usually not a tremendous cost, but this is definitely something to keep in mind when you talk to your lender.
You should also be aware that the origination fee isn’t necessarily a static cost; different lenders might have different fees. If the first lender you talk to demands an origination fee that you feel is too high, you might want to consider talking to another lender.
Finally, you should know your credit score and the clout it can carry. A good credit score can help you get a lower origination fee, and an excellent credit score can be an even better bargaining tool in your negotiations.