What is an Origination Fee?

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A lender will typically charge an origination fee up front in order to cover their costs associated with processing a new loan application. The fee is considered compensation for processing the loan application. The fees for a loan are typically expressed as a percentage of the total loan amount, and in the United States, they range anywhere from 0.5 percent to 1 percent of a mortgage loan origination.

What Is an Origination Fee?
Origination fees paid for the services such as processing, underwriting, and funding. These fees are sometimes referred to as "discount fees" or "points," particularly when they equal 1% of the amount borrowed. Origination fees can also be calculated as 1% of the total amount borrowed.

• A lender will charge an mortgage loan origination fee, which can range anywhere from 0.5 percent to 1 percent of the total loan amount, in exchange for compensation for processing a loan application.

• These mortgage loan origination fees are typically set in advance of the loan execution, and should not come as a surprise at the time of closing. 

• Although origination fees are sometimes negotiable, reducing them or avoiding them typically means paying a higher interest rate over the life of the loan.

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Understanding Origination Fees

A commission-based payment is very similar to what is known as an origination fee. If a lender charged a 1% fee for the loan's origination, the lender would make $1,000 on a loan of $100,000, or $2,000 on a loan of $200,000, depending on the size of the loan. The origination fee is the payment that is made in exchange for the initial services provided by the lender. Because a lender may have to put in the same amount of effort into processing a $50,000 loan as they would a $500,000 loan, the origination fee may represent a greater proportion of the total loan amount in some cases.

A mortgage calculator allows one to compare the total fees that various lenders charge for a mortgage. These charges are typically determined in advance, but they unexpectedly go up when the transaction is being finalized. They need to be included on the disclosure that is provided at the closing.

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Origination Charges: A Brief History

Selling the borrower a loan with a higher interest rate typically resulted in the lender earning exorbitant origination fees and yield spread premiums (YSPs) during the late 1990s and the middle of the 2000s. Predatory subprime lenders had a particular interest in extending loans to borrowers who had poor credit or whose incomes could not be verified. The origination fees that these lenders frequently charged could reach up to 4% or 5% of the total loan amount, and they made thousands of additional dollars in YSPs.

After the global financial crisis of 2007–2008, the government enacted a number of new laws. These laws placed restrictions on the types of compensation that could be given to lenders. Lenders were incentivized to rein in the practices that had made them wealthy during the housing boom thanks to the pressure that was exerted by the public. The average amount of the origination fees was reduced to 1% or less.

If a borrower can secure a lower interest rate in exchange for a higher origination fee, it is typically in their best interest to do so because the interest savings they will realize over the course of the loan will be greater than the origination fee.

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How to Save on Origination Fees

Origination fees for mortgages are sometimes negotiable; however, a lender cannot and should not be expected to perform their services without compensation. In most cases, you will be required to make a concession to the lender in order to obtain a lower origination fee. The practice of agreeing to pay a higher interest rate in exchange for a reduced fee is by far the most common method.

Instead of the origination fee, the lender effectively earns their commission from the YSP. This is carried out by means of something that is known as "lender credits." They are factored into the overall cost of the mortgage as negative points. Because the total amount you pay in interest over the life of a longer mortgage will generally exceed the amount you would have paid in an origination fee, this is a good deal for borrowers only if they plan to sell or refinance their home within the next few years. This is because on longer mortgages, the total amount you pay in interest will generally outweigh what you would have paid in an origination fee. In the second scenario, you should give some thought to collaborating with one of the most reputable mortgage refinance companies so that you can be certain you are getting a favorable offer.

You can also read our other article about What Is a Short Refinance?

You have the option of negotiating with the seller of the home to have them pay your origination fees. In the event that the seller either needs to sell the home quickly or is having difficulty selling the home, this is the scenario that is most likely to play out. You also have the option of negotiating with the lender to reduce or eliminate the origination fee altogether. This might not involve agreeing to a higher interest rate if, for instance, you have shopped around and can provide evidence of a better offer from a competing lender. In this case, you would not have to accept the higher rate.

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If the mortgage is for a large amount and has a long term, as well as if you have excellent credit and a reliable source of income, a lender may find your company appealing enough to reduce the fees you have to pay because of the attractiveness of your business.

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Last but not least, make it a habit to carefully examine the components that make up the origination fee. Some creditors include additional fees, such as those for the application and the processing of the loan, in the total cost. If this is the case, you should inquire about the possibility of having those bundled fees waived.

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