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Asian couple studies their purchase contractFor most, your home is not only your greatest investment but your most expensive one. And that expense includes not just the purchase price but a list of other costs that some buyers gloss over when they sign on the dotted line. For example, you face insurance costs, taxes and closing costs. One of the expenses you face when buying a home is origination fees, also known as origination charges. These can actually add on thousands to your closing costs. Here is a breakdown of mortgage origination fees, their cost and how you can potentially lower them.

A financial advisor can offer you insights into buying a residence that could save you a significant sum over the life of a mortgage.

What Is a Mortgage Origination Fee?

A mortgage origination fee is a charge from your lender that covers processing costs. For some, you receive this as one fee that you pay at closing when you finalize your mortgage refinance or home purchase. But, occasionally, lenders split origination fees into separate costs, like the underwriting fee and the processing fee.

The processing fee pays your lender for taking your loan application and pulling together related documents. Meanwhile, the underwriting fee covers the expense of having someone look at your application and decide if you qualify.

In the case that your origination fee covers multiple charges, your lender will likely itemize them in your paperwork. This documentation is part of your Closing Disclosure, which your lender must provide to you at least three days before your closing date. If not, it will be a one-line item that covers all origination charges. Origination charges vary from lender to lender, though. So, it’s important that you review origination fees when comparing your options.

Origination fees usually average between 0.5% and 1.5% of your overall loan amount. So, for example, if you took out a home loan worth $300,000, you may pay $1,500 to $4,500 in origination fees.

Avoiding and Lowering a Mortgage Origination Fee

Mortgage application

Although borrowers usually pay origination fees, they may be able to get their home seller to cover the cost as part of a seller concession. These are essentially agreements that the home seller pays the buyer’s closing costs. That can include costs like the origination fee, title insurance, appraisal fees and mortgage points.

A seller is most likely to agree to seller concessions if:

  • The property needs repairs or is in poor condition
  • There is low buyer demand
  • The home has been on the market for a long time
  • The homeowner needs to sell and move quickly

Alternatively, your lender may cover your origination fees. In this case, they provide you with something called a “lender credit.” This credit covers either a portion or all of your closing costs. However, in these cases you must agree to a bigger loan amount or a higher interest rate in return so in fact the lender isn’t not actually covering the origination fees.

If you can’t avoid paying a mortgage loan origination fee you may be able to lower the fee. Try some of these tactics during your home-buying process:

Shop around

As mentioned above, the cost of origination fees varies depending on the lender. So, you should make sure you have a couple of options available to you. Ask for loan estimates from at least a few lenders before you settle on one. Loan estimates are three-page documents that detail your potential mortgage costs. The lender must provide you with your loan estimate within three business days once they receive your application. And every lender must use the same form. As a result, it’s easier to compare multiple offers.

Negotiate

The lender itself decides how much to charge for origination fees. As a result, they have the ability to drop or raise the charge based on negotiation. You have a better chance of talking down an origination fee if you have an excellent credit score. Or, if you put down a large amount on your home, you may also be able to get lower charges. This is because a large down payment indicates you’re a lower-risk borrower and won’t be as likely to default on your loan. However, you should know that this doesn’t extend to other fees. Any third-party fees, like appraisal fees, are non-negotiable through the lender.

Pay Upfront

Some homebuyers can afford to pay their closing costs upfront. If you have that capacity, it might help you in the long run. For example, you’ll know the exact amount you need to spend on closing costs. In comparison, someone who can’t pay it upfront must pay it over the course of their loan because it gets folded into the mortgage itself. That can make it feel ambiguous as to how much you actually pay in the end.

The Takeaway

Father and son outsideOccasionally, you may find a lender that doesn’t charge any origination fees. This is usually more common with online lenders, though. They have a smaller overhead than large, traditional financial institutions like banks. And that doesn’t mean you don’t end up paying for it anyway through other costs. The best practice is to shop around before you sign with a particular lender. Even if they don’t bill you an origination charge, they may charge you a higher fee elsewhere. So, you want to collect loan estimates from multiple lenders. That way, you have a variety of options, and you can make an educated decision based on the most competitive offer.

Tips to Save for a Home

  • Planning financially for a home involves more than picking the right price range. You have to account for smaller costs, like origination fees. If you need help budgeting for the wide range of charges home buying brings, consider working with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset’s mortgage calculator can help you know what you can afford by revealing the total cost of a loan spread over the duration of the mortgage.
  • Mortgage rates are more volatile than they have been in a long time. Check out SmartAsset’s mortgage rates table to get a better idea of what the market looks like right now.
  • You put plenty of funds into your home, whether it’s origination fees or a down payment. But did you know that you can use your house to pay for other costs in your life? Homeowners age 62 and above can borrow against the equity in their home with a reverse mortgage. Then, they can use any extra savings from it to fund their retirement.

Photo credit: ©iStock.com/Erdark, ©iStock.com/phototechno, ©iStock.com/Henrik Weis

Ashley Kilroy Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
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