Refinancing can save you a significant amount of money each month. If you are paying off a $165,000 mortgage loan with an interest rate of 7 percent, you'll be paying about $1,097 each month. But if you reduce the interest rate on this same loan to 4 percent, your monthly payment will fall to just more than $787 a month. That's a monthly savings of $310. But refinancing isn't free. You'll have to pay several closing costs, including one of the priciest — the loan origination fee.
The Loan Origination Fee
The loan officer with whom you work during the mortgage process — the one who helped you complete your Uniform Residential Loan Application, told what documents you needed to send in when applying for your loan and walked you through the application process — is the one who receives the loan origination fee. As the name suggests, this fee compensates loan officers for the time they spend on selling a loan, collecting the information needed to close the loan, ordering home appraisals and running credit checks. It is one of many closing costs that you'll pay when refinancing your mortgage loan.
The loan origination fee varies widely by lender, with some lenders not even charging this fee at all. The Federal Reserve Board, though, says that you can expect to pay as much as 1.5 percent of your outstanding loan balance. If you are refinancing a loan with a balance of $200,000, your loan origination fee at 1.5 percent would come out to $3,000. Lenders list this fee as a percentage point of the loan. If you have a $200,000 balance and your origination fee is $2,000, you are being charged one mortgage point.
Factors Influencing This Cost
Lenders consider a wide range of factors when calculating their loan origination fees, and different lenders rely on different factors. If your refinance is relatively straightforward — you have good credit, you have at least 20 percent equity in your home and you've worked at the same company for the last 10 years — your lender should charge you a lower loan origination fee. If you are self-employed, struggling with bad credit, have only 10 percent equity in your home and are living in a home that is losing value, your refinance will be more challenging to your lender. Because of this, your loan origination fee will probably be higher because your loan officer has to work harder — by collecting more documentation to verify your income or searching for mortgage program designed for homeowners with low equity — to close the refinance.
The loan origination fee, like most refinancing closing costs, is negotiable. If you feel that your loan officer wants to charge you a fee that's too high, you can request a lower one. You can also walk away and work with a different lender who is willing to refinance your loan with a smaller fee. Remember, your lender is required to send you a Good Faith Estimate within three days of your loan application. This statement will list estimates of your refinancing costs, including your loan origination fee. Make sure that this fee matches up closely (there can be some minor changes) on your HUD-1 Settlement Statement, the document you get when you are closing your refinance. This document is similar to the Good Faith Estimate, only the charges it lists — including your loan origination fee — are no longer estimates but are the actual amounts your lender and third-party servicers are charging you.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.