A mortgage origination fee is an amount you pay your lender to process your home loan application. The fee is usually 0.5% to 1% of your home loan, though some lenders may cap it for a jumbo mortgage.
A mortgage origination fee typically covers the underwriting process, which is when your lender checks your financial documents to make sure you qualify for your home loan. Read on to find out all you need to know about this common fee.
How a Mortgage Origination Fee Works
When you apply for your home loan, your lender will give you the mortgage origination fee as a percentage. For example, if your home loan is for $300,000 and your mortgage origination fee is 1%, then you’ll pay your lender $3,000.
A mortgage origination fee may include the costs of:
- Processing your application paperwork: gathering your ID, proof of income, assets, debts, credit history, and more.
- Underwriting your loan: making sure you meet all the requirements for your particular type of home loan (conventional, FHA, VA, FDA).
Note: It takes time for your lender to go over all your documents and they may ask for supporting information during the underwriting process. It’s a necessary step to make sure you can afford your mortgage and won’t be at risk of losing your home.
Where You’ll See a Mortgage Origination Fee
A mortgage origination fee will be listed among your closing costs, which means you pay it when you seal the deal on your new home.
It’s a good idea to find out exactly what the mortgage origination fee will be when you’re shopping around for the best lender because closing costs can quickly add up.
Closing costs may include:
- Mortgage origination fee: Sometimes called a processing fee or underwriting fee
- Application fee: Might be partly refundable when your mortgage closes
- Appraisal fee: Payment to a third party to make sure the purchase price matches the market value, and that the property is safe for residency
- Private mortgage insurance (PMI): You may pay this depending on the amount of your down payment or what type of home loan you take out
- Home insurance, property taxes, public register, and transfer fees
- A settlement agent or attorney’s fees
- Real estate agent commission: Both the selling and buying agents get a commission
Note: With some home loans, it might be possible to roll some of your closing costs into your loan instead of paying all the fees upfront. This might save you money in the beginning but will cost you more in the long run because your loan is bigger and so you’ll pay more interest.
How to Compare Home Loans With and Without the Fee
Be wary of lenders who offer to waive the mortgage origination fee because you might find they just call the fee by a different name – or they might hike up your interest rate to cover the difference.
Here are a few pointers on comparing home loans:
- The interest rate refers to the monthly interest amount, while the annual percentage rate (APR) is the interest rate plus various fees rolled into one.
- You want to compare the APR between lenders – not the interest rate – because this will give you a more accurate picture of the total costs of your loan.
- If the lender claims to charge no origination fee, see if there’s a “processing fee” or “underwriting fee” or another fee that’s roughly 1% of your loan.
Use a home loan calculator to explore different possibilities of loan terms, fixed vs. variable interest rates, down payment amounts, and other factors that will affect your mortgage experience.
Are There Ever Caps on Mortgage Origination Fees?
You might be able to find a lender who will cap your mortgage origination fee so you’re not penalized for buying a high-value home.
For example, Baton Rouge Telco caps origination fees on jumbo loans. This means there will be a limit on your mortgage origination fee when your home loan is for $400,000 or more.
So, let’s say you got a home loan for $800,000. With Baton Rouge Telco, you would pay a fixed mortgage origination fee instead of the usual 1% of your home loan. This is good news when 1% of $800,000 is a whopping $8,000!
What Is a Mortgage Origination Fee: Next Steps
The bottom line is that you need to consider more than just the purchase price of a house when it comes to figuring out your budget. You need to make sure you’ve set money aside for your mortgage origination fee and other closing costs, too.
The mortgage origination fee is an essential expense. It compensates your lender for taking all the steps to make sure you and your family get a home loan you can comfortably afford. Click below to find out more!