Overpaying The Loan Origination Fee Could Screw Up Your Refi

If you’re considering taking advantage of today’s best refinance mortgage rates to lower your payment or ditch that Hybrid Adjustable Rate Mortgage, there are several things you must know about closing costs to avoid overpaying. One of the most important fees to consider when refinancing is the loan origination fee. What is it and how much is a reasonable amount to pay for mortgage origination? Here are several tips before you refi to help you avoid pay too much for your next home loan.

Loan Origination Fee Definition

Simply put, the loan origination fee is the fee paid to the person or company arranging your refi. Also called origination points, this fee is typically paid to a broker or faceless giant like Amerisave or Wells Fargo Refinance. How much should you pay for the loan origination fee? One percent of your home loan amount is perfectly reasonable; however, it’s not uncommon to find brokers charging double this amount, even more.

Mortgage loan origination fees are negotiable, so when shopping for a broker offer to pay one percent as a condition for doing business.

The reason your loan origination fee is so important is that you’ll need to recoup your out of pocket expenses from mortgage refinancing before gaining any benefit from a lower payment amount. Here’s an example to illustrate why recouping your loan origination fee is so important:

Should I Refinance My Mortgage?

Suppose for instance that you’re refinancing your home mortgage for $275,000 and the old interest rate was 6 percent. Once you find an honest mortgage broker willing to work for a one percent, the loan origination fee portion of your closing costs will be $275,000. There are other lender fees to consider and negotiate; however, for the purpose of this discussion we’ll assume that the total closing costs on this transaction are $5,500.

Assuming you’re able to lock in today’s going refinance mortgage rate of 4 percent your new monthly payment will be $1,312. The old payment at 6 percent was $1,648 which represents a monthly savings of $336. You can easily determine how long it will take to recoup your closing costs by dividing the total out-of-pocket expenses by the amount you’re saving each month. This will tell you the number of months it’s going to break even recouping your expenses from mortgage refinancing. In this example it’s going to take ($5,500/$336=17) seventeen months to break even. (Which is really good… your results may vary)

The average homeowner refinances their mortgage every four to five years. If you engage in this kind of serial mortgage refinancing before recouping your cash you’ll be losing money no matter how low your refinance rates.

There are of course other fees to consider besides your loan origination fee. Paying lender junk fees will lengthen the amount of time it takes to break even by raising your total closing costs. Some examples of junk fees you’ll encounter when refinancing your home include rate lock fees, application fees, processing fees and courier fees. If you find any of these on your Good Faith Estimate when shopping for mortgage rate quotes consider finding another broker to arrange your next home loan.