Buying a new house in Texas often requires a mortgage. In addition to paying the monthly mortgage bill, you should also expect to pay an origination fee. What is an origination fee on a mortgage, and how much will it be?

Champions Mortgage, Houston’s trusted mortgage broker, finds high-quality mortgage deals for your income and credit score. Home buyers and refinancers can rely on us for any questions about the mortgage process and terms. This blog explains mortgage origination fees, why they exist, and how they factor into your home-buying process.

What Is a Mortgage Origination Fee?

Mortgage origination fees work as compensation to the lender for processing loan applications. When you apply for a mortgage, a responsible lender has to assess your qualifications, like your real estate, assets, and debt-to-income (DTR) ratio. The evaluation costs money before you even receive the loan, so the fee is their way of receiving some of that money back.

Most fee percentages sit around 0.5 to 1% of your loan amount. For example, a lender with a 1% origination fee may charge $1,000 on a $100,000 loan.

Reliable lenders estimate the origination fee upfront, which you can find on the loan estimate or closing disclosure. By law, a lender cannot increase the origination fee unless under specific circumstances. Moreover, the change cannot be last-minute.

How History Has Helped Lower Origination Fees

In the past, if you asked, “What is an origination fee on a mortgage?” a lender may have answered as high as 5% of the total loan. Additionally, they used yield spread premiums to increase the amount of compensation they received on higher-interest loans. High origination fees and YSPs from predatory lenders plagued the loan market until the late 1990s and early 2000s.

In 1999, federal legislation began reducing the amounts brokers could charge for origination fees. Student loan fee rates lowered to around 3%, while the real estate market remained on the upper end until the 2008 Housing Market Crash. Some reasons for the crash include poor-quality adjustable-rate mortgages and substantial increases in housing costs.

Trying to reduce the chances of market crashes of 2008’s scale, the U.S. government passed the Dodd-Frank Act of 2010 and several others like it. Among some of the restrictions – some of which they later rolled back – were limits on origination fee rates and the elimination of YSPs. Now, you will rarely find an origination fee of more than 1% of the total loan.

When You May See a Higher Origination Fee

As mentioned, you should not see a higher origination fee than the one on your loan estimate, save for specific circumstances:

• Changing the type of loan you want
• Reducing the down payment for your loan
• Your lender’s inability to verify certain income
• Not locking the interest rate on your potential loan
• Finding out the appraisal for your desired home is less than expected
• Changes to your credit score based on new loans or missed loan payments

Therefore, you may see a higher fee rate the longer it takes to finalize the purchase of your desired home. Of course, you shouldn’t rush into buying a house, but moving with prudence can help reduce the chances for origination fee changes.

What To Do If the Fee Changes

While you may not be able to prevent an origination fee increase, you need to understand why it’s there. You can expect trustworthy brokers to have a good reason, but we suggest against trusting them blindly. Instead, ask them questions and receive their explanations to make sense of them, such as:

• Can you explain why this new loan estimate is different from the previous one?
• What differences can I expect from my current loan request?
• Has my total loan amount changed in any way?
• Are there any additional fees associated with this current loan estimate?

I Haven’t Received a Loan Estimate

If you don’t have a loan estimate, you have applied for a mortgage before October 3rd, 2015. You also won’t receive one if you apply for a reverse mortgage, a home equity line of credit, or some homebuyer assistance programs. What is an origination fee on a mortgage in these cases, and how do you find it?

Mortgages before October 3rd, 2015, and reverse mortgages produce two different forms aside from the loan estimate. The Good Faith Estimate (GFE) should list basic information about your loan offer, including the total amount, interest rate, and other fees. The Truth-in-Lending Disclosure includes the cost of your mortgage loan, your annual percentage rate, and more.

HELOC and certain homebuyer assistance program loans only receive two Truth-in-Lending disclosures, one initial and one final. Pre-October 2015 and reverse mortgages receive GFEs, initial Truth-in-Lending and final Truth-in-Lending disclosures.

Higher Origination Fee vs. Higher Interest Rate?

Is it better to pay a higher origination fee, or are you better off paying higher interest rates? As noted, the origination fee usually comes to around 0.5 to 1% of the total loan. Meanwhile, interest rates tend to be around 7% for 30-year mortgages and 6.5% for 15-year ones. 

While we cannot say which option is better without knowing your financial limits, we generally believe a higher origination fee may benefit you. You can negotiate with your lender for a higher origination fee and a lower interest rate to pay less over the lifetime of the mortgage loan. You generally save more money by paying less interest over longer periods.

What You Can Do To Lower Home Purchase Costs

At Champions Mortgage, we help Houston residents lower the closing costs on a home with our financial experience. We strive to help you get into your home or business more effectively so you pay less money starting this new chapter in your life. Our team answers questions like, “What is an origination fee on a mortgage?” and “How do I lower interest rates?” every day.

Are you ready to get a better deal on your mortgage options? Call Champions Mortgage at (281) 727-2500 to set up a meeting with our professional brokers today!