What Is the Origination Fee?

By
Real Estate Mortgage Broker with The Mortgage Experts at America's Mortgage

Q: What is an origination fee?

A: The origination fee is pure profit for the mortgage broker. Part of it may go to the mortgage broker's employer, but it is still 100% profit for the mortgage company.

Sometimes a mortgage lender will tell you that the origination fee is being used to buy down the rate, meaning it's being used to secure a lower interest rate by making a one-time up-front payment. That is not correct. Loan discount fees (sometimes referred to as "paying points"), and not the origination fee, are used to buy down the interest rate. It's important to have the fees listed on the correct lines on the Good Faith Estimate and the final settlement statement in order to be in compliance with the Real Estate Settlement Procedures Act (RESPA).

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Topic:
Lending / Financial
Location:
Colorado
Tags:
mortgage tips
origination fee
discount fee

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Rainmaker
123,606
Chris Thomas
The Mortgage Experts at America's Mortgage

Marty - There are two sales channels for mortgages: retail and wholesale.  When you get a loan directly from the lender, you are using the retail channel. 

There are higher rates for retail loans because there is overhead associated with the transaction.  Wells Fargo has to pay their employees whether they sell anything or not, they have to pay benefits to employees, there are costs associated with the buildings they own, etc.

When you get a loan from a broker, you are using the wholesale channel.  There are cheaper rates with wholesale loans because there is no overhead for the lender.  If a broker does not sell anything, he doesn't get paid anything.  It is 100% commission income. Also, the lender (Wells Fargo) needs to entice the broker to use them as the lender.  The broker has relationships with many different lenders and the only way those lenders can get a broker to choose them is to offer cheaper interest rates. 

The broker does not necessarily have to sell you the loan at the cheaper rate.  Here's what usually happens.  Let's say the retail rate is 3.5% if you use Wells Fargo directly.  The interest rate for the broker is probably 3.375% for the exact same loan.  However, instead of giving you the lower rate, the broker raises the rate to 3.5% (he knows what you would pay if you went to Wells directly), and then Wells pays him a rebate of a couple thousand dollars.  He keeps the rebate (which makes him happy) and you get lower closing costs (which makes you happy).  Everyone wins, including Wells Fargo, because there is a lot of profit in the loan for them as well.

Hope this helps!

Chris

August 28, 2012 08:43 PM
Anonymous
Marty

Thanks Chris- makes sense - although I am still a little surprised that there is such a big spread - the broker has overhead too and I would not think it is that much less than a company like Wells Fargo which has the infrastructure in place and  - as you pointed out  - has to pay those employees anyway.

Obviously there needs to be an incentive for the broker who now takes on the risk of qualifying the borrower and closing the deal.  

So now my question is - why would Wells Fargo even bother with attempting to make a 'retail' loan since their terms are so non-competitive?

Also, it was a surprise for me to learn that banks are making more on loans today than the historical norm!  I'm not complaining (too much - who would have ever thought the rate to the consumer would ever hit 3.5%)  but it is surprising that the Fed is maintaining low rates in part to spur lending and consumption and the banks are taking advantage of those rates to increase their historical spread and in turn somewhat negate the actions of the Fed!

 

 

August 28, 2012 10:24 PM
Rainmaker
123,606
Chris Thomas
The Mortgage Experts at America's Mortgage

Marty - Regarding the overhead, I meant that Wells does not have any overhead when a broker sells one of their loans.  Brokers are a free sales force for lenders. 

Wells sells loans through the retail channel because there are plenty of borrowers who think they are getting a better deal if they go directly to the bank.  They are wrong, but that's how effective all the advertising is.  There are also a lot of people who get all warm and fuzzy sitting in the middle of the retail bank at the desk of a loan officer.  They get to feel important for a few minutes, and they pay a higher interest rate for the next 30 years.  The banks know this and take advantage of it.  It is capitalism at its best. 

If a business can operate effectively through both the retail and the wholesale sales channels, they are going to do it.  None of this has anything to do with how fair it is for the consumer.  It's all about making the most money possible.

By the way, the Fed controls short term interest rates, not mortgage rates.  Mortgage rates are determined by the demand for the mortgage backed securities that Fannie Mae and Freddie Mac issue.  Foreign governments buy the bonds.  If there is a big demand for them (as there is now that no one wants to invest in Europe), then rates are low.  We have low rates in this country because Europe is a mess.

Chris

August 29, 2012 06:46 AM
Anonymous
Aaron

Hey Chris, I am just about to sign the papers for my FHA loan refinance. I'm just not sure if things are fair or not. 

The Origination fee is 7,029.91 ! How much are they taking?

My credit score is 760

They are charging me 3% "points" for the origination fee

Box 2 I recieve a 8,797.46 credit for a rate of 3.625%

My credit report and upfront mortgage ins. are 65.46

title services and lenders' title insurance 981.93

daily interest charges 304.64

total charges for all other settlement services 2550.15 

Total estimated settlement charges 782.60. 

It feels like they are taking the 3% fee and having a big old laugh at my expence. 

Is this true? My current interest rate is 5.5% FHA 30 fixed. 

What should I do? The mortgage broker is a friend.

I haven't talked to him about it yet. I looked at my original loan documents and wasn't

Charged 7000$ for an origination fee. 

September 13, 2012 01:08 AM
Rainmaker
123,606
Chris Thomas
The Mortgage Experts at America's Mortgage

Aaron - Your friend is making $7000.  Nice friend - make sure he takes you to a very expensive restaurant afterwards.  He can certainly afford it.

Chris

September 13, 2012 04:32 AM
Anonymous
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Rainmaker
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Chris Thomas

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