In 2023, on a purchase price of $250,000 and with a down payment of $50,000, PNC Bank charges $3,500 for origination. Whereas for the same purchase amount, Bank of America charges a $3,349 origination fee.
As a new homebuyer, you should be aware of all the costs associated with your mortgage application. A mortgage origination fee (MOF) is a fee that a homebuyer pays the lender to cover the loan application costs.
Mortgage Origination Fee – An Overview
- Mortgage origination fee is mandatory and covers the cost of mortgage application process.
- The mortgage origination fee is generally around 0.5 to 1% of the total loan amount. It is paid at the closing of the mortgage transaction along with other closing costs.
- Under Schedule-A of the federal tax returns system, mortgage origination fee is tax-deductible.
What Is a Loan Origination Fee?
Lenders charge mortgage loan origination fees to process and originate your loan. When you apply for a mortgage, the lender incurs various costs in the loan application process. The origination fee covers these costs.
How to Calculate Origination Fee?
The mortgage origination fee is generally 0.5 to 1% of the total loan amount. For instance, if you borrow a $200,000 loan, you would have to pay around $2,000 as the origination fee. You must consider the origination fee when you compare loan offers, as it can affect the total cost of your mortgage.
Additionally, a mortgage has many other associated fees, such as appraisal fees, credit report fees, and title search fees.
When Should I Pay the Origination Fee?
The origination fee is generally payable at the closing. The lender will then present you with a closing disclosure that outlines all the costs associated with your loan.
Furthermore, the closing disclosure will list the origination fee as a separate item. The origination fee is to be paid along with other closing costs.
Why Do Lenders Charge for Mortgage Origination?
Mortgage application processes have many associated costs. The mortgage origination is one such mandatory cost that a borrower pays to the lender.
- Administrative Costs: Lenders incur various administrative costs when processing a mortgage application. These costs include verifying the borrower’s information, documentation, credit checks, and reviewing the loan application. The origination fee helps offset these administrative expenses.
- Underwriting and Evaluation: Lenders have to assess the borrower’s creditworthiness, evaluate the property, and determine the risk associated with the loan. The origination fee covers the expenses involved in this evaluation.
- Loan Origination Services: Lenders provide services throughout the mortgage origination process. They guide borrowers through the application process, provide information, and handle the necessary paperwork. The origination fee compensates the lender for these services.
- Business and Profit: Lenders are profit-driven entities that provide mortgage loans as a service. Charging an origination fee is one way lenders generate revenue and cover operational costs. It contributes to the lender’s profitability.
Also, it’s important to note that while origination fees are common, the percentage charges can vary.
Can You Save on Mortgage Origination Fees?
Yes, you can save on mortgage origination fees. Here’s how you can do it:
- Compare Lenders: Getting multiple quotes is the best way to arrive at the best rate. Even a minor variation in MOF can save you a decent amount.
- Negotiation: You can request your lender to lower the origination fees without increasing the interest rates. This can work if you have a stable income and a good credit score.
- Ask the Seller: You must talk to your seller, they may pay a portion of your closing costs.
Additionally, if you pay upfront mortgage points, your lender may allow some concessions on the origination fee.
Is Mortgage Origination Fee Tax-Deductible?
Yes, MOF is tax-deductible. The Internal Revenue Service in its Federal tax return Schedule-A considers mortgage points and mortgage origination fees as tax deductible.
The Bottom Line
The mortgage origination fee is a compulsory amount that you will have to pay to the buyer. We advise you to compare mortgage origination fees from different lenders.
Additionally, review the closing disclosure carefully as it contains the list of all closing costs. You must also inquire with your lender if you find any discrepancies in the list.
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Frequently Asked Questions
Who pays origination fees?
Home buyers pay the origination fee, which is typically about 0.5 to 1% of the amount being borrowed.
How can you finance a loan origination fee?
You can finance a loan origination fee by rolling it into the total loan amount. You can also negotiate with the lender to potentially waive or reduce the fee.
Is mortgage origination fee negotiable?
Yes, you can negotiate mortgage origination fee with the lender. Moreover, some lenders may waive or give some concession on the fee.
