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What is an Origination Fee?

Written by:  Joe Chappius
|
Editor:  Abraham Jimoh
Last updated: May 23, 2024
  • Origination fees are charges by lenders for processing, underwriting, and funding a new loan, typically a percentage of the loan amount, and are integral to the overall cost of borrowing.
  • These fees vary widely based on the loan type and lender, with average rates ranging from 0.5% for mortgage loans to as high as 8% for personal loans.
  • Origination fees are not always set in stone and can often be negotiated or even waived.

What is an Origination Fee?

Origination fees are upfront charges by a lender for processing, underwriting, and funding a new loan. These fees are collected at closing and are based on the total loan amount you borrow.

When applying for a mortgage, auto loan, personal loan, or other types of financing, you’ll often encounter an origination fee, which can amount to 1% or more of the total loan amount.

For Example:

  • On a $200,000 mortgage, a 1% origination fee would amount to $2,000.
  • On a $20,000 auto loan, a 2% origination fee would equate to $400.

This fee gets added to your total closing costs.

What are Origination Fees For?

Origination fees are charges levied by lenders for the purpose of covering the costs of processing, underwriting, and funding a new loan. These fees, usually a percentage of the loan amount, are due at closing.

They vary by loan type and lender, but are a standard part of the lending process. These fees help cover the lender’s administrative costs and are essential for borrowers to consider when evaluating the overall cost of a loan.

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Strategies to Lower or Avoid Origination Fees

If you want to minimize origination fees, here are some strategies to consider:

  • Shop around with multiple lenders to compare origination fee structures. Local credit unions often have lower fees.
  • Ask lenders if they offer fee waivers for things like having an existing account in good standing or setting up autopay from that institution.
  • Pay down balances on existing debts to improve your credit scores, income-to-debt ratios and qualification status to be in a better position to negotiate lower fees.
  • If purchasing points to lower interest rates, calculate breakeven time on savings versus upfront costs.
  • Limit additional services lenders offer like appraisal or document fees which get added to origination fees.
  • Opt for a no-closing cost loan offer if available. This structures fees into the rate without upfront costs.

Read More: How To Improve Your Chance To Get Approved for a Loan

How to Pay Origination Fees

When it comes to covering origination fees, borrowers have several options, each with its own implications for the overall cost of the loan. Here’s a breakdown of the common methods for paying these fees:

  1. Upfront Payment: The most straightforward method is paying the origination fee upfront at closing. This means the borrower pays the fee in cash as part of the closing costs. While this increases the initial amount needed at closing, it avoids adding the fee to the loan balance, ultimately saving on interest over the life of the loan.
  2. Rolling into Loan Balance: Some borrowers choose to add the origination fee to their total loan amount. This option reduces the upfront cost but increases the overall loan balance, leading to higher interest payments over the term of the loan. It’s a viable option for those who prefer not to or cannot pay a large sum upfront.
  3. Lender Credit: In some cases, lenders may offer a credit to cover part or all of the origination fee. This often comes with a higher interest rate on the loan. While it reduces upfront costs, it can result in a more expensive loan over time due to the increased interest payments.
  4. Negotiated Waiver: Depending on the lender and the borrower’s financial standing or relationship with the lender, it might be possible to negotiate a waiver or reduction of the origination fee. This is more common with borrowers who have excellent credit scores, high income, or substantial assets.
  5. Points System: Some lenders allow borrowers to pay points upfront to reduce their origination fees. A point is typically 1% of the loan amount, and paying points can sometimes lower both the origination fee and the interest rate. This method is beneficial for borrowers planning to keep the loan for a long time, as the upfront cost can be offset by the long-term savings on interest.

Each of these methods has its advantages and drawbacks. Borrowers should consider their financial situation, the length of time they plan to hold the loan, and the overall cost implications when deciding how to pay origination fees.

Questions to Ask About Origination Fees

To make an informed decision, be sure to ask lenders:

  • Is the origination fee negotiable at all?
  • What percent of the total loan amount does the fee represent?
  • Can I pay points to reduce the origination fee? What are the costs/benefits?
  • Are there any ways I can waive or reduce the fee through lender promotions?
  • What other closing costs get layered on top of the origination fee?
  • Does your quote include any lender credits to help offset fees?

Knowing exactly what goes into origination fees, when they can be avoided or reduced, and how they impact your total loan cost empowers you to make smart financing decisions.

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Origination Fees by Loan Type

Origination fees vary not only by lender but also by the type of loan. Here are some guidelines on average fee ranges for common loans:

Loan TypeAverage Origination Fee (%)Notes
Mortgage Loan0.5% – 1.5%Varies by loan size and lender.
Personal Loan1% – 8%Depends on credit score and loan amount.
Auto Loan0% – 2%Higher for used cars or longer loan terms.
Small Business Loan2% – 7%Varies significantly depending on lender.
Student Loan1% – 4%Federal loans have fixed fees; private loans vary more.
Home Equity Loan2% – 5%May include additional costs like appraisal fees.
Refinance Loan0.5% – 1.5%Generally lower for streamline refinances.

This table shows that origination fees can range from as low as 0.5% for mortgage loans to as high as 8% for personal loans, emphasizing the importance of considering these fees when choosing a loan.

The variability is influenced by factors like the borrower’s credit score, the loan amount, the type of loan, and the lender’s policies.

For example, auto loans might have higher fees for used cars, while small business loans’ fees can vary more widely between lenders. Understanding these variations is key for borrowers to estimate the total cost of borrowing accurately.

FAQs about Origination Fees

What Exactly is an Origination Fee?

An origination fee is a charge by lenders for processing a new loan application. It covers costs such as underwriting, processing the application, and funding the loan. The fee is usually a percentage of the loan amount.

Why Do Origination Fees Vary By Loan Type?

Origination fees differ based on the type of loan due to varying processing complexities, risks associated with different loan types, and lender-specific policies. For instance, mortgage loans often have lower origination fees compared to personal loans.

Can I Negotiate the Origination Fee?

Yes, origination fees can sometimes be negotiated. It largely depends on your creditworthiness, the lender’s policies, and the competition in the lending market. Having a strong credit score or a long-standing relationship with the lender can be advantageous.

Should I Pay the Origination Fee Upfront or Add It to My Loan Balance?

The decision to pay upfront or roll the fee into the loan balance depends on your financial situation. Paying upfront avoids additional interest charges, while adding it to the loan balance reduces immediate out-of-pocket expenses.

Do All Loans Have Origination Fees?

No, not all loans come with origination fees. Some lenders offer loan products without origination fees as a competitive advantage, though they might charge a higher interest rate in lieu of the fee.

How Do Origination Fees Affect My Loan’s APR?

Origination fees increase the Annual Percentage Rate (APR) of a loan. The APR reflects the true cost of borrowing, including interest and fees, and is a more comprehensive measure than the interest rate alone.

Is It Possible to Avoid Paying Origination Fees?

In some cases, yes. Shopping around for loans, maintaining a good credit score, and negotiating with lenders can sometimes lead to waivers or reductions in origination fees.

Are Origination Fees Tax Deductible?

For some loan types, like certain mortgages, origination fees can be tax-deductible. However, this depends on the loan purpose and your tax situation. It’s advisable to consult with a tax professional for specific advice.

What Happens to the Origination Fee if My Loan is Denied or I Back Out?

Typically, origination fees are paid at closing, so if a loan doesn’t go through, you generally won’t be responsible for this fee. However, some lenders might charge non-refundable application fees separate from origination fees.
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Author Joe Chappius

Joe is a seasoned financial adviser with over a decade in the industry, and Head of the US Market at financer.com. Throughout his career, he's directly assisted families, high-income individuals, and business owners with their financial needs. Joe draws on his wealth of client-facing experience to author insightful and high-quality financial content.

Editor Abraham Jimoh
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