Anyone who has spent time looking into mortgages knows that lenders charge origination fees on their loans. It is standard practice in the mortgage industry. Other types of bank loans come with origination fees as well. But what about hard money? Do hard money lenders charge origination fees, too?
For starters, understand that hard money lenders are private lenders who enjoy quite a bit of flexibility. Whether or not they charge origination fees is their choice. That said, nearly all of them do. Origination fees are an industry standard whether loans are made by private lenders or licensed financial institutions.
What the Fee Covers
Most of us understand that lenders make the bulk of their money on interest payments. Likewise, lenders get the fact that customers like to see interest rates as low as possible. Yet they still need to cover the costs of doing business. That’s where origination fees come in.
Hard money lenders, like banks and credit unions, need to pass on the cost of doing business to their customers. They could roll all those costs into interest rates and be done with it. But the resulting higher rates would scare customers away. So instead, they keep interest and costs separate. They recover their costs by assessing a variety of fees.
The origination fee covers the cost of actually initializing and processing a loan. For example, lenders like Salt Lake City’s Actium Partners need to spend money preparing loan documents. Documents need to be prepared by trained professionals and filed with the appropriate authorities. All of it costs money.
How Origination Fees Are Assessed
Hard money lenders are allowed to determine for themselves how they want to assess origination fees. Actium Partners says that, more often than not, the fees are assessed as a percentage of the amount being borrowed. Let us arbitrarily say 2%. The origination fee on a $100,000 loan would be $2,000.
Should origination fees be based on a flat rate instead? There is plenty of debate about that within the financial services industry. Be that as it may, the current system has been the default standard for a long time.
There May Be Other Fees
Although the origination fee is one of the more well-known fees associated with hard money lending, it is certainly not the only one. Lenders may assess other fees as well. It really depends on a lender’s internal policies.
Most hard money lenders will charge an appraisal fee to cover the cost of appraising a borrower’s collateral. The practice isn’t all that different from mortgage lenders passing appraisal fees on to home buyers. Borrowers ultimately bear all the costs associated with approving and funding loans.
Don’t Confuse Fees with Points
One last thing to consider are the points lenders often charge. Points are used by both hard money and traditional lenders as a way to offset interest rates. In exchange for lower rates, a borrower will pay a certain amount of money measured as points. Point values are determined based on the value of a loan and current interest rates.
In essence, paying higher points means a lower interest rate. That saves a borrower money in the long term. Lenders use points to entice borrowers away from the competition. What they lose on individual loans they make up for with more customers.
Lenders of all types cover their costs by assessing various fees. The origination fee is just one of many available options. Hard money lenders tend to charge origination fees just like banks. It is a standard practice within the lending industry.