As a first-time homebuyer, there may be many mortgage terms that sound foreign to you. For example, when you start looking at interest rates offered by lenders, they will often be accompanied by a number of “points” or “origination fees.” What are these extra fees and do you have to pay them?
These are the lender’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 lenders make their money. They include things like document preparation fees, processing fees, underwriting fees, tax service processing fees, and courier fees.
Origination fees, or points as they are commonly called, can vary from lender to lender. You can expect to pay anywhere from 0.5% 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. On average for every 1-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 up front, it could end up saving you much more over the course of the loan.
You 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 closing of the final total and breakdown of all the closing costs and fees.
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.