If you’re considering mortgage refinancing you might wonder if you have to pay the origination fee. There’s more to getting a good deal than just focusing on a specific lender like USAA Mortgage Rates; the fees you pay including the origination fee can make or break the deal you’re getting. Here is everything you need to know about that origination fee to make sure you’re getting the best deal when mortgage refinancing.
Origination Fee Definition
The origination fee found on your Good Faith Estimate is paid to the person or company arranging your home loan. Sometimes you’ll get offers without it; this doesn’t mean the broker isn’t getting paid but that someone else, usually the lender is paying the origination fee for you.
There are no free lunches when it comes to your home loan so why would the lender agree to pay your broker origination fee? Settlement charges are paid by the lender in exchange for higher refinance mortgage rates. In addition to paying your broker fee the lender could also pay your closing costs; however, will raise your interest rate twice.
Should you agree to higher rates to get your origination fee paid? Refinance rates are now near a sixty-year low, something you’re unlikely to see again this lifetime. If you’re currently paying six-percent or more on your existing home loan then it could be well worth your while to accept a higher interest rate in exchange for the lender paying the origination fee.
You can figure out if refinancing in this way makes sense by approximating your break-even point. The break-even point is simply the amount of time it’s going to take you to recoup your out-of-pocket expenses from the lower payment amount.
How to Approximate Your Break-Even Point
Notice that I say “approximate” your break-even point. Some people in the business get all bent out of shape and start waving their arms around when you talk about breaking even recouping closing costs. The reason is that your break-even point doesn’t take into consideration changes in term length. The term length of your home loan is defined as the amount of time you have to pay the mortgage back. How does term length affect breaking even recouping your out-of-pocket expenses?
If you’re currently paying on a thirty-year home loan and refinance with a 15-year term length you’ll break even faster because you’re paying less interest after the first year than if you continue paying on a 30-year mortgage. Conversely, if you’re paying on a 15-year mortgage and refinance with a 30-year term it’s going to take you longer to break even then the approximation allows. You’re paying more in interest than you were before so breaking even takes longer. If you’re keeping the same term on your refi (15 year to 15 year or 30 year to 30 year) then this discussion is purely academic.
Now that I’ve satisfied the naysayers (if you’re one and aren’t satisfied too bad) here’s how to approximate your break-even point. First, figure out how much your payment will go down each month based on the new mortgage rate. (be sure and compare your payment with and without the origination fee markup)
Second, look at the total closing costs on your Good Faith Estimate and divide this figure by the amount you’re saving each month. This will give you the number of months (approximately) it will take you to break even recouping your out-of-pocket expenses. If this timeframe is acceptable and you don’t plan on selling or getting another mortgage then it probably makes sense to avoid paying your loan origination fee.
How Much Refinance Rate Markup?
How much higher can you expect your refinance rates to be if the lender pays the origination fee and/or closing costs? That depends on how much the broker is charging you. A reasonable amount to pay for loan origination is one percent of your mortgage amount; however, many brokers will try to charge your more.
Don’t be afraid to negotiate the amount of your mortgage origination fee as a condition of doing business. As for your refinance rates, the lender will typically pay one percent of your mortgage amount for every .25 percent you accept in higher interest rates. Whether or not it makes sense to take higher mortgage rates in exchange for the lender paying your settlement costs depends on your personal situation.
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You can learn more about getting the best refinance rates without paying lender junk fees or markup by checking out my free Underground Mortgage Videos.
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