If you’re shopping around for a new home loan or are considering one of those no closing costs home loans, you might wonder if it make more sense to pay the mortgage origination fee upfront or do no closing cost offers really save you money? Many lenders flaunt their no closing cost loans as a hook to get you in the door; however, these loans can quickly turn that low mortgage rate into a sour deal if you don’t look at the big picture. Here are several of my best tips to help you decide if paying that mortgage origination fee is worth your hard-earned cash.
Mortgage Origination Fee Definition
What is the mortgage origination fee? Is it simply another junk fee used to boost the lender’s profit margin at your expense? Actually, the mortgage origination fee is the most practical fee you’ll find in your loan documents. The reason I say practical is that mortgage loans are essentially retail products arranged by brokers. The broker arranging your home loan is the loan originator and the best way to pay this person for the work they do is with the mortgage origination fee.
Remember the person arranging your home loan is going to get paid no matter what and if you opt for one of those no closing cost home loans that fee is going to be paid by your lender. What’s wrong with that you ask? In fact, many brokers will tell you not to worry about fees that aren’t coming out of your pocket as a selling point. What many of these brokers aren’t telling you about their lack of a mortgage origination fee is that you’re accepting a higher, often much higher interest rate instead of paying your own closing costs.
Higher Rates Means Higher Payments
Here’s an example to illustrate my point. Suppose for instance, you are refinancing your home for $315,000. A typical mortgage origination fee from an honest broker is one percent of your home loan amount. In this example the mortgage origination fee would be $3,150 paid at closing. Opting for a no closing cost home loan would in this example, get you a mortgage rate of 6.75%. You’ve saved yourself $3,150 at closing so far…not a bad deal right? Your payment on this no mortgage origination fee home loan would be $2,043 per month.
What if you had paid that $3,150 at closing for the mortgage origination fee? Paying your closing costs nets you an interest rate of 6.0% meaning your payments will be $1,888 per month. That’s a difference of $155 per month or $1860 per year. If you opt for the no closing cost home loan you’ll actually be paying that $3,150 you saved at closing over and over every two years. Is this saving you any money at all? I think you can see how no closing costs home loans are a bad idea.
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