Wednesday, 22 November 2017

Mortgage Fees and Points: Did You Pay too Much?

Written by Posted On Friday, 05 May 2006 00:00

Did you pay a point or an origination fee when getting your mortgage? How about a mortgage broker fee, did you pay one of those? Did you pay all three? If you didn't pay an origination fee, then how did the mortgage broker get paid? Didn't use a broker? Aren't brokers and bankers the same? Aren't points and origination fees the same?

From a tax deductibility standpoint, probably. A "point" is one percent of the loan amount, and a "discount point" is tax deductible because it's a form of prepaid interest. You pay a point or two upfront and get a lower interest rate in exchange. Instead of paying the interest over a longer period, you can discount your rate by giving the lender the interest up front.

Origination charges are generally accepted as a tax deduction as long as it's expressed as a percentage of the loan amount, like a point. But an origination charge is not a discount point. It's not levied to reduce your rate, it's what the lender or mortgage broker collects as income.

Typical origination charges are 1 percent of the loan amount, and on your settlement statement you will see just that … "Origination: 1 percent." If you're paying more than that I think you're getting screwed.

Okay, maybe not totally, loan officers have to eat too and if they only charged 1 percent origination fee on a $45,000 FHA loan and split it with their company they're not going to make it for very long.

I do however think you're getting screwed if you're paying a 2 percent origination fee on a regular $200,000 mortgage. If you're getting quoted a 2 percent origination charge in all likelihood you can get the same deal down the street for only 1 percent.

Some loan officers justify charging 2 percent or more origination charges because the loan was super-hard to do, such as someone with damaged credit. While that could be justified several years ago, such talk is nonsense with the advent of automated underwriting systems.

Nowadays if a loan is truly sub prime the loan is usually submitted through the sub prime lenders automated underwriting system before any work is started on the loan. The loan officer takes the loan application from the borrower, runs a credit report then logs onto the sub prime lenders who spits out an automated approval.

All the loan officer has to do is simply run down the checklist of required items and forward them to the lender for approval.

Which brings up another issue: Discount Points. Discount points are called so because they discount the interest rate. A typical trade-off is 1 discount point for each .25 percent reduction in interest rate. You could get a 7.00 percent rate with zero points or 6.75 percent if you paid one discount point. If you're getting charged 2 discount points, then you should conversely get a rate .5 percent higher for zero points. If you're getting charged 3 points, I'll bet it's nothing more than more income for the loan officer, without a subsequent rate drop.

A discount point is tax deductible because it's a form of interest. If you're paying 5 points on a loan, not only is it not interest, you're getting taken advantage of.

If you're using a mortgage broker and there are points on the loan, those points are supposed to go to the lender, not the broker. It's not the broker that discounts the mortgage, the lender does.

A mortgage broker can charge an origination fee or a mortgage broker fee but discounting an interest rate with discount points paid to the broker isn't correct. I know, this happens all the time but in reality brokers charging points shouldn't be doing so. If they want to make more money, and hey this is America, then go right ahead but charge origination or broker charges instead.

How much is too much? At what point do you, the consumer, stop and say, "Whoa buddy, I think you're making too much money on my deal!"

I don't know. I really don't. Certain lenders have maximum amounts they allow their loan officers to charge, a common maximum is 3 percent of the total loan amount. In other cases certain state laws designed to thwart predatory lending kick in, limiting the amount a loan officer may charge.

But whatever fees you encounter, understand the differences between points, origination and broker fees. And if you feel like saying, "Whoa buddy, I think you're making too much money on my deal!" then go ahead and say it. Because you'll probably be right.

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