In short, mortgage lender costs, also known as origination fees, are the fees you pay for the lender to process and close your loan. Lender costs are the fees that they charge borrowers that they keep as opposed to the fees that they charge that they pay out to third parties such as the appraisal, credit report, tax service or flood certification fees. Lender fees are one component of the total closing costs you pay when you get a mortgage which also include title company and escrow or attorney fees. Isolating lender fees may enable you to negotiate lower costs and better mortgage terms.
Additionally, different lenders may use different terminology for the various fees they charge which can make things complicated from the borrower's perspective. Some lenders charge an origination fee while other lenders charge an administration, processing or underwriting fee. Some lenders may charge no fee, a flat fee or break-out lender fees into separate items. Borrowers should become familiar with the different lender fees that they may be required to pay and know how to identify these costs when they are comparing mortgage proposals. That way you can determine and compare total lender costs, even if different lenders use different terminology.
Lender fees can be more confusing than other types of closing costs because they can vary by lender type and other factors. The variation and number of different lender costs can make it challenging to evaluate and compare fees across multiple lenders. For example, the fees charged by a mortgage broker are different than the fees charged by a bank.
It is also important to emphasize that mortgage lender fees are usually less than a third of total closing costs, depending on your loan amount and other factors. Plus, closing costs are only one consideration when you evaluate mortgage proposals. Borrowers should compare lender fees in addition to total closing costs and interest rates to determine the loan and lender that is right for them.
The table below outlines the various lender costs that you may come across in the mortgage process. Please note that different lenders charge different fees and use different terminology so you are usually required to pay some but not all of these costs, depending on the lender and mortgage. For example, administration fee, processing fee, underwriting fee and origination fee are all used relatively similarly by lenders and usually represent the majority of lender costs. Additionally, discount points, as outlined below, are optional for borrowers. You can elect to pay discount points to lower your mortgage rate but this is totally the borrower's discretion to decide.
Review the table below to understand the range of potential lender fees you may be required to pay. The more you know about lender costs, the more likely you are to find the lender offering the lowest fees.
There are two documents borrowers should review to determine lender costs: the Loan Estimate and Lender Fees Worksheet. Request both of these documents from lenders when you request mortgage quotes or apply for your loan. We summarize these documents below:
The table below shows lender fees, APRs and interest rates for leading lenders near you. We recommend that you contact multiple lenders and request mortgage proposals to find the best loan terms. Shopping for your mortgage is the best way to save money on lender fees.
When a lender offers a "no cost" mortgage, it is important to understand that this loan will likely have a higher interest rate than a loan with standard closing costs. Because a no cost mortgage has a higher interest rate, the borrower has a higher monthly payment and pays thousands more in interest expense over the life of the loan as compared to a mortgage with standard closing costs.
Be sure to understand the trade-off between not paying closing costs and paying a higher interest rate which increases your monthly payment and interest expense
If you are interested in a no cost mortgage, despite the higher interest rate and monthly payment, be sure to ask the lender up-front what costs you are required to pay, if any. Make sure that you are not required to pay any lender or third party closing costs such as appraisal report, title and settlement agent / escrow fees. In some cases no cost mortgages may require the borrower to pay certain costs, such as an appraisal fee, up-front, and then those costs are rebated to the borrower when the mortgage closes.
Additionally, make sure that no costs are rolled into the mortgage, which increases your mortgage amount and monthly payment. Rolling closing costs into the loan amount is a clever way for lenders to make borrowers pay closing costs without charging up-front fees. With a true no cost mortgage your loan amount when your mortgage closes should equal the loan amount you agreed to obtain at the beginning of the process.
"Determining Costs." My Home by Freddie Mac. Freddie Mac, 2019. Web.