There are a variety of fees you may incur in your mortgage transaction.
One is an origination fee, which is paid directly to your lender for the work involved in reviewing and approving your loan.
Origination fees are expressed in points or as a percentage of the loan amount. A 1.25% (1.25 point) origination fee on a $100,000 loan will cost you $1,250.
Lenders need to make money in the mortgage process, either through the fees they charge directly to the borrower (such as the origination fee) or through the rate they charge.
For example, lender A is offering a 0 point (no origination fee) conventional mortgage for 4%.
That means that lending company A will make most of its money when your loan is sold to Fannie Mae or Freddie Mac on the secondary market.
But this is also good for you: if you’re tight on cash, you don’t have to come up with the origination fee, saving you thousands of dollars at closing.
Again, the lender will make most of its money when the loan is sold.
Mortgage lender B also offers you a conventional mortgage, but lender B is offering a rate of 3.75%, with a 1 point origination fee, which you’ll pay directly to B at closing.
This means lending company B accepts that it will make little or no money when the mortgage is sold.
This is OK, though, because company B has already made its money from the origination fee.
This may also work in your favor, providing you have sufficient funds at closing to pay the origination fee.
You’ll get an interest rate that is lower than you would get from lender A, and a lower monthly payment.
If you plan on remaining in the property for many years, it may be in your financial interest to pay an origination fee at closing.