Legal Definitions - new-loan fee

A new-loan fee is an upfront charge paid by a borrower to a lender when a new loan is created. This fee is typically paid at the loan's closing and is often used to "buy down" or reduce the interest rate on the loan. It is commonly expressed in "points," where one point equals one percent of the total loan amount. By paying a new-loan fee, borrowers can often secure a lower interest rate, which can lead to reduced monthly payments and significant savings over the life of the loan.

• Example 1: Home Purchase Mortgage

  Sarah and Tom are purchasing their first home and are offered a 30-year mortgage at an interest rate of 6.5%. Their lender also presents an option: if they pay a new-loan fee of 1.5 points (1.5% of the total loan amount) at closing, their interest rate will be reduced to 6.2%. Sarah and Tom calculate that the long-term savings from the lower interest rate will outweigh the upfront cost, so they agree to pay the fee.

  Explanation: The 1.5 points paid by Sarah and Tom constitute a new-loan fee because it is an upfront charge made to the lender at the time their new mortgage is originated, specifically to secure a more favorable, lower interest rate on that loan.

• Example 2: Small Business Expansion Loan

  Maria, a small business owner, needs a $150,000 loan to purchase new equipment for her bakery. Her bank offers a loan at an 8% interest rate. To make the loan more attractive, the bank provides an alternative: pay a new-loan fee of 1 point ($1,500) at closing, and the interest rate will drop to 7.75%. Maria decides to pay the new-loan fee, recognizing that the reduced interest rate will save her money over the loan's term.

  Explanation: Maria's payment of $1,500 is a new-loan fee because it is an upfront charge made to the bank at the moment her new business loan is issued, specifically for the purpose of obtaining a reduced interest rate on that loan.

• Example 3: Mortgage Refinance

  David wants to refinance his existing home mortgage to take advantage of lower market interest rates. His current loan is at 5.5%, and a new lender offers him a 4.5% rate, but with a new-loan fee of 2 points. David weighs the cost of the 2 points against the substantial savings he'll gain from a full percentage point reduction in his interest rate over the new loan's term. He decides to pay the fee to secure the lower rate.

  Explanation: Even though David is replacing an old loan, the fee he pays to the new lender is a new-loan fee because it is an upfront charge associated with the origination of a *new* mortgage agreement, specifically designed to lower the interest rate on that new loan.