A loan officer from Advisor’s Mortgage sent me his rate sheet today. It shows the rate for a 30-year FHA fixed rate mortgage at 4.75%.
At that rate, the mortgage company will not charge the borrower an origination fee, which is typically 1.0% of the base loan amount. This sounds like a pretty good deal, but what does it really mean to a home buyer?
Here’s a quick analysis: Let’s say you’re buying a home for $200,000 using a minimum down payment (3.5%) FHA mortgage. The base loan would
be $193,000. At 4.75% the principal, interest, and mortgage insurance payment would be $1,202. The origination fee, calculated as 1% of the base loan, would be $1,930.
The origination fee is a fee charged to you by your lender as part of your closing costs. It is a customary fee, along with other lender-fees such as a “Commitment Fee,” “Underwriting Fee,” “Document Prep Fee,” etc. If you are paying your closing costs with money out of your pocket, then this offer saves you $1,930 in cash. That’s a good deal for you as long as the lender isn’t increasing their other normal fees or charging discount points to make up the difference.
But if your purchase agreement states that the seller is paying some or all of your closing costs, then this offer of no origination fee doesn’t have nearly as much beneficial punch to it. We all know that when the seller pays your closing costs, you’re really paying your own closing costs because those closing costs are part of the price you’re paying for the home (see Who’s Your Sugar Daddy?). So if your closing costs are $1,930 less, because you’re not paying an origination fee, then that’s $1,930 less that you have to add to the price of the home you want to buy. In other words, you’re saving $1,930 off the
price of your home. But that doesn’t really put $1,930 in your pocket – instead, it reduces your house payment by about $12 per month. That’s nice, but it’s not huge. It would take over 13 years for you to realize a savings of $1,930.
If the mortgage company is willing to give up 1% of the loan amount, what if instead of not charging an origination fee they used the 1% savings as a discount point and gave the buyer a lower interest rate? A 1% discount point should result in a rate reduction of at least 0.25%. So in this example, the discounted rate would be 4.5% instead of 4.75% which would reduce the monthly payment by almost $30. That’s a heck of a lot better than a $12 savings.
The offer of no origination fee is significant – it’s worth 1.0% of your loan amount, or in this example of a $200,000 home it’s worth $1,930. But, that value is really only realized if you are paying your own closing costs with cash out of your pocket. Otherwise, if the seller is paying your closing costs, tell your loan officer that you’ll pay an origination fee but you want to the 1.0% savings to buy down your interest rate. Either way, you’ll be money ahead with this offer.
