When Do You Pay The Mortgage Origination Fee?
Mortgage loan origination fees are usually paid as part of closing costs, which may include the following, depending on whether the transaction is a purchase or refinance:
Mortgage Lender Origination Fee
The fee can cost anywhere between 0.5% and 1% of the total loan amount before prepaid interest points and covers the cost of processing and underwriting your loan.
Application Fee
Lenders often treat this fee a bit like a deposit. You get it back if the loan closes, but if it doesn’t, you may lose a portion or the entire fee. That’s because lenders often apply the application fee toward covering the cost of an appraisal or credit check.
Appraisal Fee
If it’s not covered by the deposit or not covered in full, you’ll pay separately for the cost of any home valuation and safety check. If the lender must determine the boundaries of the property, a survey fee may roll into this.
Credit Check
You’ll pay for the credit check at closing if it isn’t covered by your application fee. The credit report fee is typically $50 – $100, depending on the lender.
Mortgage Insurance
With Federal Housing Administration (FHA) loans, an upfront mortgage insurance premium gets paid at closing. U.S. Department of Agriculture (USDA) loans charge an upfront guarantee fee or funding fee, which works similarly to mortgage insurance. In both cases, a percentage of the total loan amount is paid at closing.
If you get a conventional loan with a down payment of less than 20%, some lenders will allow you to pay for mortgage insurance upfront, effectively lowering your monthly mortgage payment.
VA Funding Fee
Department of Veterans Affairs (VA) loans don’t have mortgage insurance, but there is a funding fee that’s anywhere between 1.25% and 3.3% of the loan amount, depending on the size of your down payment, your service status, whether it’s your first time using a VA loan and whether it’s a purchase, refinance or VA Streamline. The funding fee can be paid at closing or folded into the loan amount.
Borrowers receiving VA service-connected disability benefits, eligible surviving spouses of veterans and Purple Heart recipients are exempt from paying the funding fee.
Prepaid Mortgage Interest Points
If you buy down your interest rate, you’ll pay for the points at closing. By buying down your interest rate, you can save money over time.
Title Insurance
Although this cost is usually paid by the buyer, it can be negotiated. In all cases, either the buyer or seller must pay for a lender’s title policy, which protects the lender if someone else comes along with a claim to your home. The buyer can purchase an owner’s title policy, which also covers them in case something like this comes up.
Escrow Fees
An escrow account during the closing process helps protect home buyers and sellers by ensuring the money for closing costs isn’t taken out of the account without authorization.
Settlement Agent
The settlement agent oversees the closing and serves as a notary. They must make sure you understand what you’re signing and that everything goes smoothly.
Attorney Fees
In some cases, an attorney must be present at the closing in accordance with state law.
Accrued Interest
When you close on your mortgage, during the period between closing and your first mortgage payment, your lender will usually have you pay daily interest charges until your first payment.
Homeowners Insurance
You usually pay 6 – 12 months of homeowners insurance upfront and set up an escrow account, depending on the size of your down payment.
Property Tax
You must pay up to a year of property tax when you close on your mortgage. If you’re purchasing a home, you’ll also pay a property tax research service. The service estimates your property taxes as closely as possible so you don’t end up with surprise costs. The service will also let your mortgage lender know if you miss any property tax payments.
Recording Fees And Transfer Taxes
When you buy a home, your county or other local authority must record the transaction in the public register, and you must pay for that.
Real Estate Agent Commission
With a purchase, this is typically 6% of the purchase price, which gets split between both agents. While the real estate agent’s commission is often paid by the seller, who pays is negotiable, which is why we’ve included it here.
Hidden Costs Of The No-Origination-Fee Mortgage
If a mortgage has no lender origination fees, in most cases, you’ll end up paying a higher interest rate over the course of the loan. Depending on how long it takes you to pay off the loan, it may cost up to tens of thousands of dollars over the life of the mortgage. While you save money upfront, the mortgage may cost you way more in the long run.
If the interest rate isn’t any higher, the lender may be naming a fee something else, like an underwriting or processing fee. These types of fees are what the origination fee is meant to cover, so it’s the same thing.
Other Mortgage Fees That Add Up
As someone buying or refinancing a home, it's important to understand that you can be charged a fee at various points. While most mortgage fees not related to the interest rate you get are closing costs, there are other fees. Let’s run through them.
- Rate lock: If you lock your interest rate to protect yourself from the possibility of interest rates rising in the near future, you’ll pay a rate lock fee. The shorter the rate lock period, the cheaper it will be.
- Commitment fees: A lender must set aside funds for a loan before they issue it. In exchange for the guarantee of a loan, they charge a commitment fee. The fee is a hedge against changing market conditions. Once the loan is approved, the borrower can receive the money at closing.
- Underwriting or processing fees: If you see an underwriting fee (the fee to make sure you qualify for the loan) or a processing fee (the fee to process your application), what you’re actually seeing is an origination fee masquerading as something else.
Higher Mortgage Loan Interest Rates
If the mortgage has no origination fee – and for this discussion, let’s include fees that serve a similar purpose but go by a different name – the lender will likely charge a higher interest rate.
Mortgage Points And Interest Rates Example
Let’s put some numbers to this and use a 30-year fixed mortgage with an 8.5% mortgage rate on a $300,000 home as our example. You can also use our Mortgage Calculator to try your own numbers.
Let’s say you make a 20% down payment. Your loan amount would be $240,000. First, we’ll look at the rate with one point of closing costs. Before we move on, we should note that mortgage closing costs are often called points, and one point equals 1% of the loan amount.
If you pay one point at closing, you may get a 7.75% rate. You would pay $2,400 upfront, $378,981 in interest over the life of the loan and make a $1,720 monthly payment.
Now let’s look at that same $240,000 loan with no points, so the rate is 8.5%. Your monthly payment is $1,846 and you’ll pay $424,342 in interest. In this scenario, you save $2,400 upfront but pay $45,361 more in interest.
Debt-To-Income Ratio (DTI) And Mortgage Loans
Another important thing to know when you opt for a higher monthly payment is that it will make your debt-to-income ratio (DTI) higher because you’re spending more every month paying an expensive mortgage and your existing debts. DTI is a key metric used by lenders. A high DTI can impact your ability to qualify for other loans.
Your monthly mortgage payment shouldn’t be so high that it hinders your financial flexibility in the future. A no-origination-fee loan likely means a higher interest rate, which means a higher monthly payment and a significant increase to your DTI.
Comparing Interest Rates And Annual Percentage Rates (APRs)
When lenders explain what fees they charge – or don’t charge – it’s important to figure out what you’ll be paying over the life of the loan and weigh the benefits and downsides of a no-origination mortgage. One way to do a quick comparison is to look at interest rates.
You’ll see two types of interest rates as you shop around for the best rates. The first one is the interest rate on your monthly mortgage payment. The second one is the annual percentage rate (APR), and it will be higher. APR is your interest rate with closing costs factored in. When comparing lenders and loan options, the APR is the best way to get a precise picture of how much a loan will cost.
