How to Pay Less on Home Loan Origination Fees
Your interest rate is an important piece of any loan, but you can’t ignore loan origination charges. Those up-front fees draw on savings that you might prefer to spend on new furniture, moving costs, or upgrades to your home.
What Are Loan Origination Fees?
Origination charges are fees that you pay to your lender for processing your loan application. Depending on your lender, the costs might be bundled into one line item, or they might be itemized. Typical names for origination fees include applications fees, underwriting fees, and processing fees. Lender charges can also include “points,” which are optional payments that allow you to get a lower interest rate.
The term “processing fee” doesn’t tell you much, but lenders charge these fees for all of the tasks required to close your loan. Some of those functions include:
- Gathering and organizing your documentation
- Analyzing your income, such as self-employment earnings, rental income, and deductions
- Requesting information from employers, the IRS, and others
- Verifying that documentation is accurate
- Ensuring that your application meets criteria for government programs, or that it can be sold to investors
To see your fees, review your Loan Estimate, which is a three-page summary showing essential details about your loan. It includes your monthly payment, closing costs, and other information. If you don’t already have a Loan Estimate from every lender you’re considering, get one—nothing is official until a lender provides that document.
How to Minimize Origination Charges
If you’re hesitant to pay thousands of dollars for origination charges, you have several options.
With any significant loan, it’s essential to get quotes from at least three different sources. Compare the interest rate and the total lender charges to find the best deal. The specific names used for origination charges are less important than the total dollar amount.
The most straightforward approach is to pay up-front fees. It is also the most painful approach, but at least you’ll know how much you’re spending, and you have the opportunity to get lower rates when you pay up front. Advertisers may promote “no cost” loans, but nobody works for free. The less you pay up front, the higher your rate will be.
You can choose to take a higher interest rate by using negative points if it makes sense to do so. By accepting a higher rate, your lender will make funds available (known as lender credits) to pay closing costs. But it’s best to do this with a transparent lender that shows you several options—with and without lender credits. With a higher rate, you’ll pay more interest over the life of your loan, so negative points make the most sense when you keep the loan for a short period.
Ask your lender to waive origination fees without changing your interest rate. You might not succeed, but you never know unless you ask. You have the best chance of saving money if you have great credit, an uncomplicated income source, and a relatively large loan.
If you have generous relatives, ask your lender about paying loan origination fees with gifted funds. The money may need to come from an immediate family member who is willing and able to help you document the gift in writing.
If you’re buying property (as opposed to refinancing), the seller may be able to pay some closing costs for you—as long as the purchase agreement allows for this. Even in a seller’s market, this might be an option if you adjust your offer price to reflect the concession.
How Much Should You Pay?
Origination charges depend on multiple factors. You might expect to pay as little as 0.5 percent for processing charges, or somewhere around 2 percent on the higher end. However, the devil is always in the details, and you need to evaluate fees with other factors—like your interest rate–in mind. For larger loans, fees should be on the lower end of that range. But small loans take a similar amount of work so that borrowers may pay relatively high origination charges.
What About Points?
Remember that origination charges and discount points pay for different things. A discount point lowers your interest rate, and origination fees compensate your lender for closing your loan. However, the term “points” gets used informally to refer to one percent of your loan amount, whether you’re talking about processing fees or discount points. Always ask for clarification if you’re not sure what a lender is referring to.
Other Closing Costs
Origination fees aren’t the only fees you pay. You’ll pay additional closing costs, which are also listed on the second page of your Loan Estimate. Those expenses include services provided by third-parties, but your lender arranges those services so that they might seem like lender charges. For example, lenders need to check your credit, order an appraisal, and collect funding fees for government programs like FHA loans. For some closing costs, you can shop around and find a vendor that charges less—potentially saving hundreds of dollars.
Altogether, your closing costs—with origination fees and other charges—might be between 2 percent and 5 percent of your loan amount.