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Loan Origination Fees
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Published: January 2, 2007
Whether it's buying a house or beginning college, thousands of people take out loans each year to pay for the incredible expense of living.
Once a borrower and lender agree to a loan payment sum, the loan goes into effect and the loan origination fees are activated.
Loan origination fees are charged by the lender for the use of the loan money. These fees are treated as interest accrued throughout the loan's life; although, it cannot be used for property or services provided by the lender, such as commitment fees or processing costs.
Loan origination fees generally are between a half point, or .5 percent, and two points, or 2 percent. This fee is necessary to activate the loan. It is paid to the lender handling the loan application and should be disclosed in the initial Good Faith Estimate, as well as the final closing papers, also called the HUD1 settlement statement.
Once loan origination fees are decided upon, the borrower begins to accumulate his or her loan points. These tax-deductible loan points represent the interest to be paid upfront. For example, if a $100,000 loan has 1.5 percentage points, then the borrower would pay $1,500 in points. This number is derived by dividing 1.5 by 100, then multiplying by the loan amount of $100,000.
Loan points differ from loan origination fees because, unlike the origination fees, loan points can be used to buy down interest rates. However, the amount paid as points cannot exceed the regular rates charged in a given area. These points are helpful for several reasons. For example, if a borrower decides to refinance his or her home for a lower interest rate, they likely will receive additional loan points.
The loan points accompanying loan origination fees are also known as loan discount points. These discount points can create beneficial loan discounts over time. For example, if a person takes out a loan for a home they plan to occupy for a long period of time, they often can choose to pay additional points to obtain lower interest rates. This results in loan discounts.
Loan origination fees and their corresponding points must be paid directly, with the borrower's own funds; they cannot be otherwise financed. However, if a person borrows additional funds at the time they are refinancing, they will be allowed to deduct approximately 30 percent of the total points.
Loan origination fees can become confusing technicalities; however, they are attached to every loan, whether it is received for a family buying their first home, progressing home improvements or sending their children off to college. As long as the borrower knows the basics about loan origination fees, he or she can be sure to make wise decisions that will protect his or her finances for future milestones.
Sources:
Internal Revenue Service: United States Department of Treasury. 28 Dec. 2006 < http://www.irs.gov/>.
Lewis, Roy. Loan Points to Ponder. 29 July 2005. Motley Fool. 28 Dec. 2006 < http://www.fool.com/personal-finance/taxes/2005/07 /29/loan-points-to-ponder.aspx>.
Origination Fee. 17 Oct. 2006. Carteret Mortgage. 28 Dec. 2006 < http://www.nva-mortgage.com/origination_fee.htm> ;.
Origination Fee. 2006. Wikipedia. 28 Dec. 2006 < http://en.wikipedia.org/wiki/Origination_fee>.
Once a borrower and lender agree to a loan payment sum, the loan goes into effect and the loan origination fees are activated.
Loan origination fees are charged by the lender for the use of the loan money. These fees are treated as interest accrued throughout the loan's life; although, it cannot be used for property or services provided by the lender, such as commitment fees or processing costs.
Loan origination fees generally are between a half point, or .5 percent, and two points, or 2 percent. This fee is necessary to activate the loan. It is paid to the lender handling the loan application and should be disclosed in the initial Good Faith Estimate, as well as the final closing papers, also called the HUD1 settlement statement.
Once loan origination fees are decided upon, the borrower begins to accumulate his or her loan points. These tax-deductible loan points represent the interest to be paid upfront. For example, if a $100,000 loan has 1.5 percentage points, then the borrower would pay $1,500 in points. This number is derived by dividing 1.5 by 100, then multiplying by the loan amount of $100,000.
Loan points differ from loan origination fees because, unlike the origination fees, loan points can be used to buy down interest rates. However, the amount paid as points cannot exceed the regular rates charged in a given area. These points are helpful for several reasons. For example, if a borrower decides to refinance his or her home for a lower interest rate, they likely will receive additional loan points.
The loan points accompanying loan origination fees are also known as loan discount points. These discount points can create beneficial loan discounts over time. For example, if a person takes out a loan for a home they plan to occupy for a long period of time, they often can choose to pay additional points to obtain lower interest rates. This results in loan discounts.
Loan origination fees and their corresponding points must be paid directly, with the borrower's own funds; they cannot be otherwise financed. However, if a person borrows additional funds at the time they are refinancing, they will be allowed to deduct approximately 30 percent of the total points.
Loan origination fees can become confusing technicalities; however, they are attached to every loan, whether it is received for a family buying their first home, progressing home improvements or sending their children off to college. As long as the borrower knows the basics about loan origination fees, he or she can be sure to make wise decisions that will protect his or her finances for future milestones.
Sources:
Internal Revenue Service: United States Department of Treasury. 28 Dec. 2006 < http://www.irs.gov/>.
Lewis, Roy. Loan Points to Ponder. 29 July 2005. Motley Fool. 28 Dec. 2006 < http://www.fool.com/personal-finance/taxes/2005/07 /29/loan-points-to-ponder.aspx>.
Origination Fee. 17 Oct. 2006. Carteret Mortgage. 28 Dec. 2006 < http://www.nva-mortgage.com/origination_fee.htm> ;.
Origination Fee. 2006. Wikipedia. 28 Dec. 2006 < http://en.wikipedia.org/wiki/Origination_fee>.
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