What is a Loan Origination Fee?
A loan origination fee is based on the amount of the loan, and is among the fees that home buyers will need to cover out-of-pocket, such as a home appraisal cost or closing costs. Loan origination fees are how lenders start making money on the loan before it is paid on by the borrower. Certain types of lenders may charge application fees that can be hundreds of dollars, while, instead of an application fee, other lenders will use the loan origination fee to make extra money.
Mortgage lenders determine how much the origination fees will be by calculating it from a percentage of the total loan. Although the percentage may seem low, generally around one-half to one percent of the loan, it could run as high as thousands of dollars depending on the loan amount. For example, on a $150,000 loan, a one percent origination fee would be $1500.The origination fee will vary depending on the lender. Home buyers can contact lenders to ask what the fees will be, since it affects how much is paid up front.
Annual Percentage Rate
An annual percentage rate (APR) is the amount of interest that borrowers will pay for the privilege of being granted a loan to purchase a home. The APR can affect how much the loan fees, including the loan origination fee, are because fees are included in the APR calculation when the terms of a loan are written. Buyers should carefully examine the APR listed for their loan because not only will it affect the fees, but an APR can be a sign of the value of the loan over its lifetime. For example, some loans will have a low APR and higher fees, which may be better for some buyers because the fees will be lower with a lower APR, even if they are higher up front than seemingly lower fees calculated using a high APR. Buyers should always compare fees and APRs from lender to lender to see what fits them best.
Buyer Protection
Even though loan origination fees will vary between lenders, there are laws in place to help prevent abuse and protect borrowers from paying beyond what they can afford in fees. Taking out a loan for a mortgage is a big financial commitment already and the laws protecting consumers help ensure they are not overwhelmed with fees. The Truth in Lending Act of 1968 was put in place to help define the laws lenders must follow when calculating fees and when explaining those fees to borrowers. This law does not tell lenders how much they can and cannot charge in fees. This means that lenders can still charge very high fees, however, they must disclose that information clearly to the borrower. This is why it is important for borrowers to understand how fees are calculated, to ask questions, to compare prices and to find a lender they are comfortable with.
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