How to Calculate Loan Origination Fees

Scholasticus K Jan 9, 2019
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Loan origination fees are paid to lenders for forming or originating the loan. As an individual who avails a loan it is beneficial to know how the lender charges an origination fee. To understand the nature and mode of calculation of this fee, read on.
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 smaller loans, this fee is small, and not charged as it is accommodated in the interest rate, or down payment. When it comes to loans like auto loans or student loans, mortgage loan is mentioned as a flat dollar amount. In long-term and gigantic loans, it is defined by a rate, by which we can ascertain the actual fee. We shall discuss this further.
Further 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 3-10% of the principal amount of the loan. So what expenses, facilities and services are included in the loan origination fees? This is a small list of the services and their explanations.
  • First, there's expense of making the pool of money which accounts for most origination fees.
  • There are 2 governing bodies or agencies of government, Federal Housing Administration (FHA) and its superseding agency and Department of Housing and Urban Development (HUD), which govern mortgage origination.
  • Third, safely disbursing the loan also costs quite 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.
Origination fees are represented based on percentages or points of principal amount disbursed or lent. 1 point is 1% of mortgage principal amount. Similarly 2 points is 2%.
For example:
1. Principal amount of loan: $100,000
2. Origination fees: 2 points
3. Actual origination fees: 2% of 100,000
4. Equals: $2000
Apply formula: 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.
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