How to Calculate Loan Origination Fees

When we take up a certain loan from a recognized private lender, we incur some or the other costs or fees. This is applicable for most of the long-term loans, such as mortgage loans, student loans and auto loans. Apart from that, home equity line of credit and also some other secured loans which have genuinely large principal (borrowed) amounts tend to have origination fees. A loan is a pool of money which is put together by a loan originator such as a bank or a financial institute. The originator of the loan then sends over loan to mortgage lenders and brokers. The origination fee is basically a fee which is charged for the origination of the loan, by the originator of the loan. In case of mortgages, these fees are genuinely high as let's face it, the total amount which needs to be pooled in for origination and lending is genuinely high. In most of the other smaller loans, this fee is relatively small, and often it's not charged owing to the fact that it is accommodated in the interest rate, or in the down payment. Now when it comes to loans such as auto loans or student loans, mortgage loan is mentioned as a flat dollar amount. However in long-term and gigantic loans, it is defined by a rate, with the help of which we can ascertain the actual fee, this is exactly what we shall be discussing in the following paragraphs.

In the following article, we shall see the calculation of mortgage origination fees and the other mathematics related to it. Some other essential terms and definitions have also been included. Take a look...

Loan and Mortgage Origination Fees

Mortgage origination fees are charged by the originators of the mortgage loans for the creation of the loan. This fee usually amounts to about 1-3% of the total principal amount of the loan. Prior to the year 2010, mortgage origination fees were limited to not more than 1%. However in a notification by the Federal Housing Administration, the rate was restricted to 1%. As per the notification issued late in 2009, titled Mortgagee Letter 2009-53, the limiting cap has been removed, however lenders and originators of the mortgage do not impose exorbitant origination fees. Really good credit profiles and well underwritten loans tend to have a fee of around 1%. However almost-sub-prime or dicey loans tend to have a fee that may extend to 3-5% of the principal amount of the loan.

So what kind of expenses, facilities and services are included in the loan origination fees? Well here's a small list of the said services and explanation to them, take a look...

• Well first off, there's the expense of making the pool of money which accounts for most of the origination fees.
• Then there are two governing bodies or rather agencies of the government, namely, the Federal Housing Administration (FHA) and its superseding agency and Department of Housing and Urban Development (HUD), which govern the mortgage origination. Compliance of underwriting and following guidelines of these agencies is an important expense of lenders.
• Thirdly, safely disbursing the loan also costs quite a lot.

On the whole, origination fees are the ones which are incurred to put together the loan, underwrite it properly, forward the funds to the lender or broker and then disburse it to the borrower.

Calculating Loan Origination Fees

So how to calculate loan origination fees? When it comes to mortgage loans, home loans or any other loan secured down to real estate tends to have origination fees which are represented in 'points'. A home equity line of credit is also included in such a category of loans. Now all closing costs are included in the HUD-1 Settlement Statement. Here you will find the element known as 'points'. Points usually consists of discount points and points generated by the origination fees also known as origination points. Discount points is usually pre-paid interest.

The origination fees on the other hand are represented on the basis of percentages or points of the principal amount which has been disbursed to you or has been lent. As a rule, 1 point equals 1% of the mortgage principal amount. Similarly 2 points is 2%. Let's take a look at an example:

1. Principal amount of the loan: $100,000
2. Origination fees: 2 points
3. Actual origination fees: 2% of 100,000
4. This equals to: $2000

Thus the universal formula that you can apply is: principal amount (x) origination points / 100

The percentage or points of the mortgage origination fees are often represented in the quoting document of the loan. Usually the value of the mortgage does not affect the point or percentage of the origination fees, after all the fees are applied as per a rate. It depends upon the lender, the nature of the loan and other closing costs. Now the obvious rule of thumb is that you need to search for a loan and a lender that quote lower points. Note that certain origination fees have the benefit of tax deduction. There is however one problem in case of lower origination points, either the interest or the closing costs tend to be pretty high.