- The Washington Times - Wednesday, February 7, 2007

Q: I read with interest your column that advised against paying an origination fee to receive a lower interest rate. I am a licensed real estate agent and am of the understanding that an origination fee is pure profit. Lenders who charge it claim that it’s their “cost of doing business.” I am of the understanding the origination fee has nothing to do with lowering an interest rate. Rather, it is “discount” points that lower an interest rate. Is my understanding of this accurate?

A: Your interpretation of the difference between origination fee and discount points is certainly what it used to be when I got into the business in the mid-1980s. In the Washington area, you couldn’t find a loan that didn’t already carry full closing costs in addition to a 1 percent origination fee. You are exactly correct. Lenders explained away the origination fee as the cost of doing business.

Back then, consumers didn’t have a choice. All mortgages available carried an origination fee and closing costs. Obtaining a mortgage was inherently expensive.

Luckily, times have changed. The term “origination fee” should be erased from the English language.

Borrowers now can choose among the spectrum of “coupons” available, meaning that they can choose from a variety of interest rates depending upon the total upfront cost. Total closing costs decline as the rate increases. The lower the rate, the more expensive in upfront fees.

On a 30-year fixed-rate conforming loan, borrowers can choose to pay roughly 1/4 percent higher interest rate in exchange for saving 3/4 percent in points or fees.

A 6 percent rate might carry zero points or origination fees, but closing costs, such as appraisal, title insurance, county recording fees, attorney settlement fees, and so forth will be charged. A 53/4 percent rate would carry standard closing costs plus 3/4 of a point. A 5½ percent rate might carry 1½ points.

Going the other way, 61/4 percent would carry no points and a 3/4 percent credit toward standard closing costs.

This is how the popular “zero closing cost” refinancing program works. In exchange for an interest rate that’s slightly higher, the borrower can actually receive a loan and pay no transactional costs whatsoever.

I have found that in most cases, a borrower is better off taking a higher rate with few or no fees. A good loan officer can help determine if a borrower’s particular situation warrants a low-rate, high-fee program.

No borrower should ever think that his or her only choice is a higher-cost, lower-rate mortgage.

Thanks to the ever-expanding product menu in the mortgage world, consumers now have many more choices.

And the term “origination fee” should follow the path of the Edsel and eight-track tapes into oblivion.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@pmcmortgage.com).

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