Saturday, August 25, 2007

The Good Faith Estimate, Part 1

When you apply for a loan, the loan officer is required to provide you with what is called A Good Faith Estimate. The name says directly what it is, an estimate of charges you, the buyer, will incure for closing the loan.

Two terms that are always on the estimate, but sometimes never charged are the Loan Origination Fee and the Loan Discount Points. Many people confuse the two and you should understand the difference.

  • Origination Fee : This fee is charged by the lender for servicing the loan and preparing the mortgage application, and can either be a set rate or a percentage of the loan. Typically in Minnesota, 1% is charged to the borrower.
  • Discount Points : A Point is a one time fee charged by the lender. It does two things. One, it increases the lenders yield on the loan, about 1/8 of a percent. Second, it allows the buyer to "buy down" the rate over the life of the loan. A Point is typically 1% of the loan amount. If you plan on staying in your new home for a long time, paying additional points at the beginning could benefit you by having a lower interest rate.

My two cents? I think origination fees are junk fees. Many lenders will tell you they "have" to charge this fee to make any money. However what they are neglecting to tell you is that some sell the loan shortly after you close, and get paid a fee similar to this from the investor who buys the loan. Some lenders will tell you they have to charge you a higher interest rate if you do not want to pay an origination fee, in order for them to make any money. But again, most don't tell you they get paid for selling the loan too. Also, if the origination fee pays for the work they do on preparing the loan, then why do they also charge you a "Preparation Fee" and also an "Application Fee"?

Make sure to ask questions on every fee that is charged to you. On a $300,000 home, a $3000 origination fee can take out a huge chunk of the money you were going to use for a down payment. And contrary to what many lenders will tell you, you DO NOT have to pay for an origination fee. Move on to someone else and save yourself some money!


Louisville Real Estate said...

Great article. I think a lot of people can find it very difficult to fully understand the process of procuring a loan, and this particular tip is extra important.