What You Should Know About Loan Origination Fee
If you are wondering what a loan origination fee is all about, read further as I will be discussing things that you need to know about it. Lenders usually charge loan origination fees to cover administrative costs when processing a loan. It is no different with what is called a loan fee, service fee or even an administrative fee.
Extra points could be charged as fees for other causes like documentation fees, closing fees, etc. Although these are sometimes considered by many as “points,” where every point is a percentage of the amount of loan, loan origination fees are not discount points since they not particularly lower the rate of interest. Generally, a loan origination fee is put on to each borrower regardless of the rate of interest. On the other hand, discount points are a discretionary charge, which borrowers can choose to pay if they wish a lower rate of interest.
Mortgage brokers and lenders often base loan fees on tangible costs as well as on what the market has to bear. In several cases, mortgage brokers must set fees to compensate the actual cost as well as expenditures incurred in the loan origination. If not, these mortgage brokers can be fined or penalized for up-charging borrowers. For some loan types, a loan origination fee can not be higher than a point. For a conventional loan, a loan origination fee is a little different but usually in range of one to four points.
Another thing that most lenders are considering when deterring point number charged on a particular loan is the loan sale on secondary markets. Since most lenders are trying to make conforming loans, which can be sold later on, they also take into account that once a loan is sold, it should be sold at a concession to recompense the secondary market purchaser for the time money value. Lenders will try to make up at least some of the loss by charging points to the borrower. A loan origination fee may be waived in a competitive environment though.
A buy down can make it easy for borrowers to qualify for loans when discount points are paid off to pay down the rate of interest. Buyers or sellers, which can sometimes be developers or builders, can pay a buy down. Normally, a purchaser would pay the buy down by raising the down payment. There are two benefits that can be seen in a buy down plan and these are: (1) the purchaser’s monthly payment is lesser than normal; (2) the purchaser may be evaluated by the lender for loan eligibility according to the reduced payment following the buy down
Since purchasers do not often have extra funds up front, it is an option to finance points. Take note, however, that it at times does not seem sensible for a purchaser to finance the points for buy down purpose since that will defeat the intention of obtaining lower payments.
You have to be aware that even with lower rate of interest from the buy down, such payment will increase due to the increased money value financed. If you are a borrower, you should discuss all options available with a professional financial advisor and a licensed mortgage broker before you decide to pay points on certain loan transaction.