How Do Commercial Loan Origination Fees Work?
Feb 16, 2017
As brokers, your clients turn to you for assistance throughout the commercial real estate lending process, asking questions ranging from commercial loan interest rates to how to get commercial hard money loans, and everything in between. Fortunately for them, you know your stuff.
Nonetheless, it can still be difficult to cover certain topics concisely and effectively – and your knowledge base is nothing without great communication. Our Broker Talk series is designed to help with just that, serving as a resource for hard working commercial real estate brokers looking for refreshers, tips, and tools to leverage success for both you and your clients.
Today’s topic: commercial loan origination fees. They’re a part of every traditional commercial real estate loan, but learning how they work will turn nearly every borrower into a confident one – and one who has a shot of getting a better loan.
Fees and Points: The Basics
There are two kinds of fees that a borrower may run into: fees that will affect the loan’s interest rate over the term of the commercial loan, and upfront fees that are only tied to the loan’s origination.
1. Discount Points
Commonly referred to just as “points,” discount points are an optional fee that reduces a loan’s interest rate. As a rule, this fee totals 1% of the loan total per point; for example, one point on a $100,000 loan will amount to $1,000. These optional points aren’t as common in commercial real estate loans as they are for residential lending.
2. Origination Points
While discount points are technically paid up front, they are always optional – origination fees aren’t.Instead, they are charged up front to cover various services associated with the loan, rather than to buy down the interest rate. Some commercial lenders charge these fees as “origination points,” at the same 1% rate per point as discount points operate, while others split these fees into separate categories (such as a loan application fees).Although origination fees are not optional, they can be negotiable.
Helping Your Borrowers Understand Loan Origination Fees
We’ve outlined a few ways to make sure your clients have the tools they need, regardless of what types of commercial loans they’re seeking out.
1. Explain why upfront points exist.
Loan origination fees are mostly unavoidable, but they aren’t without purpose.Lenders have a fair deal of work to do on their end, regardless of whether you’re seeking out soft money vs. hard money loans. This work can include inspection fees, notary fees, and others costs associated – just because the specifics can vary from lender to lender and based on the loan doesn’t mean they don’t have a purpose. Make sure your clients understand this, but encourage them to ask questions about the figures and factors going into each fee.
2. Teach the difference between negotiable and non-negotiable fees.
This is where those questions will come in handy. Although some loan origination points aren’t optional (unlike discount points), one fee size does not fit all lenders – or borrowers.In some instances, lenders may be willing to lower the origination fees associated with the loan in exchange for a higher interest rate. If your client doesn’t plan to have the real estate property for too long, negotiating a higher interest rate with lower upfront fees may actually save them money.Help your borrowers to navigate these differences, so they can identify the best loans for them.
3. Build relationships and find the best lender for them.
We know not all loans or lenders are the same, and neither are all commercial loan types. Are hard money loans a good idea for your client, or would traditional lenders serve their immediate needs more effectively? Lending them your ear and recommendations based your past experiences will go a long way. Every individual borrower has a vision, and you can make a big difference by helping them find their way through murky waters to crystal clear ones.
Loan Origination Fees and Your Clients
Your clients will have to deal with loan origination fees whether this is their first commercial loan or they’ve dealt with commercial real estate mortgages for years – but these fees shouldn’t be confusing. Hopefully, this refresher offered you the confidence to advocate for the next borrower who seeks out your assistance, simply by sharing your knowledge. A knowledgeable broker is a helpful broker, and a helpful broker is a valued one.