As a first-time homebuyer, there may be many mortgage terms that may sound foreign to you. For example, when you start looking at interest rates offered by mortgage brokers, they will often be accompanied by a “points” or “origination fees”. What are these extra fees and do you have to pay them?
Mortgage Origination Fees Defined
These are the lender’s or broker's costs for creating and processing (or originating) your mortgage loan. In addition to closing costs and interest rates, these fees are one of the ways mortgage companies make money. They include things like document preparation fees, processing fees, underwriting fees, tax service fees, or courier fees.
How Much Do They Cost?
Origination fees, or points as they are commonly called, can vary from lender to lender. You can expect to pay anywhere from 0.0% to 1% of the total loan amount. Say you are taking out a mortgage for $300,000. If your lender charges 1% in points, you will need to pay $3,000.
In many cases, it is possible to “buy down” your interest rate by paying more in origination fees or points. On average for every one point you pay, the mortgage rate will be lowered by 0.25%. So, if you’re being offered an interest rate of 4%, by paying an extra point (in the example above that would be $3,000 more) you can lock in a rate of 3.75%. While this is a lot of money upfront, it could end up saving you much over the course of the loan.
When are Points?
You can expect to pay the origination fees when your loan closes. This is also when you will make your down payment and pay for other closing costs. The payment is typically made via cashier’s check or wire transfer, but other secure methods can be used as well. You will be notified at least three days before the closing of the final total and breakdown of all the closing costs and fees.
Do I Have to Pay Origination Fees?The short answer is yes, in some form or another. Even if your mortgage broker does not charge points, they still need to recoup their costs somehow. That will likely be through a higher interest rate or closing costs, so your total costs will be the same or perhaps more if you don’t pay points. This might be an acceptable situation for you if you don’t have much cash to get started and you plan to refinance down the road. Points can also be rolled into the mortgage balance, which means you wouldn’t pay cash out of pocket in the case of a refinance loan. However, it would increase your monthly mortgage payment.
Can I Negotiate the Points?
You can definitely try to negotiate all or part of your lender origination fees but doing so could result in a slightly higher interest rate.
As you begin the home-buying process, understanding mortgage points will help you know how much mortgage you can truly afford and help you have enough cash on hand when you find the perfect property.