The Smooth Loan Process #2010-06

Origination Fee or No Origination Fee? We've all gotten the emails from the African Prince who needs our help to access his millions of dollars in a Trust account, right? It's easy, you just send some to him and he'll send back your cut of the millions. What could possibly go wrong? Origination fees can be the same thing (on a much smaller scale, of course). What is an origination fee and should you pay an origination fee for your home loan? The origination fee is what it sounds like. It's your lender's charge for their services in originating your home loan. Customarily, it is one percent of the loan amount but it can vary depending on the loan scenario and market conditions on the day you lock in your rate. So let's say you are given two good faith estimates (GFE) for the purchase of a primary residence. Both are 30 year fixed rate loans. The first GFE has a note rate of 5.0% and a 1% origination fee. The other is at 5.25% with 0 origination fee. Which option is better? Depends on how long you plan to stay in the loan. You will find that at five years, the difference in monthly payment between the two rates will be equal to the cost of the origination fee. So if you planned to sell the home in less than five years, the higher rate and lower cost option is best. Conversely, if this is the last house you will ever purchase, take the lower rate because it pays off in the long run. What about paying more than 1% to get an even lower rate? Maybe. You will find that more you pay in points, the less bang you get for your buck. Usually, a .25% reduction in rate costs 1% of the loan amount. But a .5% reduction in rate could cost 2.5% of the loan amount. That would make the break even point 7 years instead of 5. Also, the shorter the term of your loan, the less it will make sense to pay for a lower interest rate. The break even point for a .25% lower rate on a 15 year loan is 7 years. Almost half of the term of the entire loan! If you are taking an adjustable rate loan (yes, people still do that), then you want to make sure you break even before the first adjustment to the rate happens. Sometimes, it is just not an option to take your loan with no origination fee. If you are purchasing an investment property, plan on paying an origination fee. The fees that are charged by Fannie Mae and Freddie Mac for investment properties are practically impossible to cover through the interest rate making it necessary to charge the origination fees. Also, if your credit score is below 700 for conventional or 640 for FHA, plan on an origination fee. The Smooth Loan Process lesson for today: Depending on your situation, the lowest rate may not be the best. Or the lowest cost might not be the best. Look at all of your options before you decide. Bonus Lesson: Don't send money to the African Prince! Harold Perkins The Mortgage Advantage 480-831-1588 Harold@HaroldPerkins.com