Key Takeaways
Lenders make money on yourmortgageloan by charge you an institution fee , among other fee . An origination fee is a part of the entire loan ( usually half a percent to one percent ) that you pay off up front when get the loan [ source : Investopedia ] . Lenders do n’t do this just to ensure they ’re getting some money off your loanword up front , but because it quiet increases theinterest rateyou’re pay over the entire loanword .
For example , if you take a $ 100,000 loanword at seven percent that has a three per centum origination fee , you pay the origination fee ( and all other applicable fee , such as processing fee , closing fees , etc . ) at the time you take the loan . Your monthly requital is calculated as seven percent of the total loanword amount ( the $ 100,000 ) , which translates to a $ 665.30 defrayment per month . However , once you ’ve pay the origination fee ( and other fees ) , you ’re now pay a $ 665.30 monthly defrayal on a lower entire balance . Say the origination and other fee on this loan total $ 3,820 ( $ 3,000 on origination alone ) . Your loanword proportionality is now $ 96,180 , but you ’re still pay $ 665.30 a month . That means you ’re really pay up an annual percent charge per unit of 7.39 percentage . So the upshot of the origin fee and other up - front fees is that you ’re paying more in interest over the spirit of the loanword than you might mean you are . Interest is where the lenders make their money ; it ’s why they ’re willing to lend you money in the first property .
Do observe that the larger the loan , the less the impact these fees will have on your overall sake rate . Also remember that the higher the up - front costs on your loanword , the higher your effective interest rate will be if you pay the loan off too soon .
