What Is an Origination Fee? – Additional Loan Costs
Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.
If you are planning to buy a home or a car anytime soon, you will have to prepare for a down payment. Besides the down payment, there are other costs you will need to pay too. When you take a loan, you repay more than the interest and principal component. One such cost associated with the borrowing process is known as the origination fee. If you are not aware of the costs added to your loan, it could add hundreds of dollars to the cost of borrowing.
You can also apply for a loan that has no origination fee but this does not mean you can save on money. Hence, always do your research and compare loans before you choose a lender. Opt for an option that is ideal for your financial situation. In this guide, we explain everything about the loan origination fee and how it works.
In this article
What is an origination fee?
An origination fee is the upfront payment charged for the establishment of a new account or new loan with the bank or a broker. The fee is compensation for the execution of a new loan. It is shown as a percentage of your total loan and usually ranges from 0.5% to 1% of the loan amount. When this fee is for a home loan, it is known as the mortgage origination fee.
It is also known as points or discount fees, especially when they are equal to 1% of the loan amount. The fee is charged for services like underwriting, processing, and funding. The fee can be negotiable, however, reducing it will mean paying higher interest on the loan. It is usually fixed in advance of the execution of the loan so it should not come as a surprise at the time of closing. Several personal loan lenders do not have any origination charges and if they have, it depends on the type of loan, the life of the loan, and your credit score.
Loan originators will go from the bank to the borrower and the borrower to the bank in order to negotiate the terms of the loan. This fee is a payment to the loan originator for this work. It will only be paid when the loan is funded. But many brokers do not charge any fee and you can easily look for a fee-free broker.
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience.
Understanding how origination fees work
You might have come across commission in various buying and selling transactions and the origination charge is similar to that. The lender will make about $1,000 on your loan worth $100,000 when there is a 1% fee. You pay this fee as a payment for the initial services of the lender and it could sometimes show a bigger percentage of the loan amount in case of smaller loans since they have the same amount of work as a big loan. Hence, your origination fee could be the same whether you apply for a loan of $5,000 or $500,000. You will find the fee mentioned in the loan documents.
Determination of the loan origination fees
The origination fees are a percentage of the total loan amount for the services of getting you pre-qualified for the personal loan. When it is not possible to avoid the origination fee, you can repay it in two ways: either roll the fee in the loan balance or take it out of the funds you get. The loan origination fee will depend on various factors including your credit score, total income, assets, and liabilities. Some people can afford a loan only by having the fee taken out of the loan principal and if this is the case with you, it is totally fine. It is much more convenient to have the fee come out of the loan proceeds so you do not have to worry about it at a later stage.
If you find a loan with no origination fees, do not assume that it is a cheaper choice. When you look at no-origination fee personal loans, you need to pay attention to the other costs. Your lender will need to make money and they will try to get the money back with high-interest rates or even prepayment penalties. In such cases, a loan with an origination fee can reduce the overall cost of borrowing.
How much is the average origination fee?
As mentioned earlier, the origination fee will be a percentage of the loan amount and it usually ranges from 0.5% and 1% of the loan. A lot of factors impact the size of the fee including the loan size, lender, credit score, and the complexity of the loan. When applying for a small loan, you will find that the fee is higher than 1% of the total loan and this happens because a smaller loan will require the same processing work as a larger one.
A higher percentage will ensure that the lender is paid well for the work on the loan. The lender will inform you what the fee is well in advance and you can also find them on the loan estimate. It is something that will not increase at the time of closing.
You will pay the fees as part of the total closing costs. The closing costs will include fees like discount points, that allow you to pay an upfront fee to reduce the interest rate and prepaid interest, which will cover the interest for the period from the closing day to the end of the month.
Origination fees are negotiable
Borrowers must remember that you can negotiate the origination fees, so do not be scared to ask the lender to reduce your fees. They can be lowered by the simple reduction of fees by the lender, or by taking a higher rate of interest to cut down on the upfront costs. Alternatively, the lender might give a credit to offset a part of the fees.
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience.
Ways to reduce the origination fees
Remember that the origination charges could be negotiable, but your lender will not extend a loan for free. So, you can try to obtain a lower origination fee but it will involve something in exchange and the easiest way to do it is to take a high rate of interest. This way, your lender will earn the commission through the interest rate instead of the fee.
However, in the case of a mortgage loan, this works in your favor only if you intend to refinance or sell the asset in a few years since on longer-duration loans, what you pay in the form of interest in total will outstrip what you would have paid in the origination fee. Hence, consider a top refinance company to get the best deal. Another alternative is to get the seller to pay the fees for you and this can happen if the seller wants to sell immediately or has had trouble selling the property. In this case, you can speak to the lender and have the fee reduced to some extent. It will also not require you to accept a higher rate of interest.
If you have a high credit score and the personal loan is for a big amount, the lender might happily go easy over the origination fees. Remember to check what constitutes the origination fee since a lot of lenders bundle other fees including the processing fees in it. In that case, you must have the bundled fees waived.
All borrowers have to pay origination fees since they are attached to loans and help the lender make money. The lenders also offer incentives to the borrower in the form of lower interest rates and other fees. If you want to save on the origination fees, you need to get estimates from different lenders who do not include them in the loan. Several credit unions have no origination fees on the loan. Another way to save on the fee is to negotiate the amount you owe. When the lender is aware that you might choose another option if the fee is not reduced, they might think of reconsidering.
Should you opt for a loan that has an origination fee?
Lenders who charge origination fees consider it as a required loan expense but it is not always a deal-breaker. It could also mean a lower interest rate since the lenders with no origination fee might raise the interest rate to make up the difference. This fee is only a small part of the total loan costs. Your credit score and the loan type remain the two biggest factors that decide the loan rates you qualify for.
If you are thinking about whether a lender with no origination fee will offer better terms on the loan, you need to determine the total cost and estimate the amount of difference in the borrowing costs before you make a decision. The fee will be taken out of the loan proceeds, which means you might not receive the full loan amount. But the benefits of taking out a loan with an origination fee could be higher than the fee itself.
Steps to comparing loans with an origination fee
It is important to compare loan offers with origination charges to save money and time while ensuring that you are getting the best deal possible.
1. Research
Whether you are applying for a mortgage loan, auto loan, or personal loan, always shop around to ensure that you are getting a good rate. Get multiple quotes and ask the loan provider if they apply an origination fee. Compare and review the terms and conditions of all the loan options to avoid hidden costs.
2. Compare the APR
The annual percentage rate or APR on the loan is based on your interest rate but it will also account for the costs including the loan origination fees. Hence, when you are looking at ways to identify the total cost of borrowing, do not include the origination fee on top of the APR. It might give an estimation of a higher cost than what you would actually pay. So, if you are comparing two lenders with the same interest rate and the same loan term but a different origination fee, the APR for the loan with a low origination fee will be automatically lower than the one with higher fees.
3. Check the length of the loan
If the loan term is shorter, the interest rate will also be lower but they will come with higher monthly payments. So, if you are paying an origination fee over the higher monthly payments, you might want to look for a lender with no origination fee to keep the costs in control.
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience.
FAQs
Is it possible to avoid the origination fee?
Yes, you can avoid the origination fee completely by opting for a lender that does not charge it. However, you might have to pay a higher interest rate on the loan.
Are the origination fee and closing costs the same?
Your loan origination fee is a part of the closing costs. It is about 0.5% of the amount being borrowed and helps the lender cover the administration fee and underwriting fee.
Is the origination fee the same as the points?
Mortgage points or discount points are a type of origination fee that you will see on the mortgage documents. However, discount points are an optional way to reduce the rate of a mortgage by paying more upfront.
The bottom line
Whenever you are borrowing money, remember to consider all costs. All loans come with fees and interest but if you are not careful, you could end up paying hundreds of unexpected dollars to the loan for origination fees. However, this does not mean you immediately dismiss the loans with this fee as they could be more affordable than the loans offered by lenders who charge no origination fees.
When looking for a loan, research well and look for a lender who offers the best rate possible. Always remember to read the fine print and ask the right questions so that you can confidently choose a loan within your budget.
Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.
Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.
We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.
Images appearing across JoyWallet are courtesy of shutterstock.com.
Editor
Vandita Jadeja is a financial writer and editor at Joywallet. She loves to read and write about money and brings a decade of experience from the financial industry.
Share this article
