Friday, June 1, 2012 - Article by: Joseph Jesuele - Liberty Financial Associates -
Lenders charge loan origination fees in order to cover the lender's administrative costs in processing a loan. These can also be called loan fees, service fees, or even administrative fees. Additional points may be charged as fees for other reasons, such as closing fees, documentation fees, etc. While these are sometimes called "points" (each point is one percent of the loan amount), loan fees are not discount points because they do not specifically lower the interest rate. Loan fees are charged to ever borrower no matter what the interest rate is. Discount points, on the other hand, are an optional charge that borrowers can elect to pay if they want a lower interest rate.
Lenders and mortgage brokers base loan fees on actual costs and also on what the market will bear. In most cases, a mortgage broker must set the fees to offset the actual costs and expenses incurred in the origination of the loan. If not, they can be fined for upcharging the borrower, which is profiting from a third party or lender fee. For FHA and VA loans, this loan fee can be no higher than one point. For conventional loans, the loan fee varies but is often in the one to four point range.
Another factor the lender considers when deterring the number of points charged on a loan is the sale of the loan on the secondary market. Since most lenders try to make conforming loans that can later be sold, they also consider that when the loan is sold at a discount to compensate the secondary market buyer for the time value of money. The lender will attempt to make up some of this loss by charging the borrower points. In a competitive environment, some of those fees may even be waived.
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