While buying a home, it is easy to notice that there are many forms of costs that become a part of the entire process. A home can prove to be expensive so you might be surprised to find multiple costs that can add up to you spending more than expected on your home.
Among the many costs included in a home price tag is the mortgage origination fee. Here’s what you need to know about it and what you can do to reduce the expenditure associated with origination fees.
What Exactly is Loan Origination Fee?
One of the most important fees charged on home loans is the loan origination fee. It is a fee you have to pay banks or NBFCs for your home loan application. It is a one-time fee that is usually paid up front. You will need to pay it to the bank/NBFC instead of it being deducted from your loan amount. Some banks also call it an administrative fee. Usually, the loan origination fee will be charged only after your application is approved.
Other Fees Included in a Loan
Administrative fee - The administrative fee is charged for record-keeping and other administrative costs. This also includes the annual charge for updating your home records.
Document charges - While processing the home loan, important documents are usually kept at a central location. Banks prefer most efficient courier services to ensure the document’s safety. So, the bank will charge you the document charges while retrieval of documents during the closure or pre-closure of your home loan.
MODT Charges - Memorandum of Deposit of Title Deed (MODT) is executed for a mortgage by depositing the title documents of the property with the bank at your own free will. Government levies a stamp duty for the registration charges. Stamp duty charges can vary from state to state. This is charged on some percentage of the home loan.
Late payment charges - As the name denotes, Late payment charge is levied when you delay payment of EMI, the bank will charge you for the penalty. You would need to pay the interest along with the EMI for the late payment.
Legal fees - Legal fees are charged when banks opt external lawyer to validate the legal aspects of your home loan.
Technical inspection fees - This is charged for the inspection of your mortgage. Banks inspect the property to ensure that it is not over-lending.
How to Pay Less on Home Loan?
Some of the alternate names for origination fees include application fees, underwriting fees, and processing fees. Lender charges can also include “points,” which are optional payments that allow you to get a lower interest rate. If you are looking to save some money on origination charges, you have several options.
Look Around - With any substantial loan, it’s essential to get quotes from at least three different sources. Compare the interest rate and the total lender charges to find the best deal. The specific names used for origination charges are less important than the total dollar amount.
Pay Upfront - The most straightforward approach is to pay up-front fees. It is also the most painful approach, but at least you’ll know how much you’re spending, and you have the opportunity to get lower rates when you pay upfront. Banks may promote no-cost loans, but nobody works for free. The less you pay upfront, the higher your rate will be.
Accept Higher Interest Rate - By accepting a higher interest rate, your lender will make funds available (also known as lender credits) to pay closing costs. It is advisable to do this with a transparent lender that shows you several options—with and without lender credits. With a higher rate, you’ll pay more interest over the life of your loan, so negative points make the most sense when you keep the loan for a short period.
Bargain - Request your lender to waive origination fees without changing your interest rate. You may not succeed, but you never know unless you ask. You have the best chance of saving money if you have great credit, an uncomplicated income source, and a relatively large loan.
Choose Longer Repayment Tenure on Loan - The longer the tenure, the lower will be your EMI payable every month. However, you should only opt for longer loan repayment tenures if you think you cannot afford to pay higher EMIs. When you opt for a longer tenure, you end up paying more interest on your home loan outstanding amount.
Additional Reading: How to Reduce EMI on Home Loan
Can I avoid paying a loan origination fee?
Depending on the terms laid out by your lender, you can negotiate or bargain around the loan origination fees. Even if you cannot completely avoid paying it, you can end up paying less than the original charges demanded by the bank.
Will origination fees impact my home loan rate?
Yes. Loan origination fees are part of the charges that you pay while borrowing money from a lender. Depending on the fees some of the banks may offer loans at lower interest rates.
Is it possible to pay less on a home loan?
Yes. You can explore multiple options online and also bargain with your lender to get the best possible deal and thereby pay less on your home loan.
Also referred to as discount fees or points, loan origination fees can cover a lot of services in addition to processing, including underwriting and funding. Before applying for and accepting a loan from a lender, it is best to go through the details around origination fees to make sure that you don’t end up making more than you expect on your home loan.
Additional Reading: 8 Tips to Reduce Your Interest Burden While Repaying Home Loan