What is an origination fee?
There’s no way to sugarcoat it: Buying a house is expensive. But even looking past the total purchase price of a new home, there’s a litany of other costs that homebuyers have to take into account.
Down payment, property taxes, homeowners insurance: These expenses add up. When you go to the closing table, you need to be sure you have enough funds available to cover all of your closing costs. And that includes the origination fee.
Origination fees may not be the most expensive cost you’ll pay when buying a new house, but you will need to pay them out of pocket. With that in mind, let’s review everything you need to know about origination fees, including how much you can expect to pay and, maybe — just maybe — how to avoid them altogether.
Origination fees explained
Origination fees are very common in financial services. Consumers often have to pay these charges when taking out different types of loans with banks and other financial institutions. These fees serve a similar function for mortgage lenders.
What is a mortgage origination fee?
A mortgage origination fee is a payment you make to your mortgage lender to cover the cost of processing your home loan.
First-time homebuyers may see “origination fee” listed on the closing disclosure and think it’s an unnecessary added cost. The truth is that processing a home loan — whether it’s a purchase or refi — requires a lot of work on the lender’s side.
Remember, mortgage lending is a highly complicated — not to mention highly regulated — industry, and even tasks as seemingly straightforward as preparing documents and filing applications are more complex than they might appear. Your origination charge compensates — not fully, mind you — your mortgage lender for taking on your loan application and doing the considerable upfront work to start processing your mortgage.
One last point: Origination fees are not the same as origination points. The latter are also known as mortgage points, which you can pay upfront in exchange for a lower interest rate.
When do you pay origination fees?
Origination fees are due at closing and will be included in your itemized closing disclosure document along with other closing costs such as a title search. As the buyer, you will be responsible for covering this expense. While other mortgage processing expenses — paying for an appraisal report and putting down earnest money, for instance — will come before the origination charge, it’s still considered an upfront fee.
Do all loans have an origination fee?
Most mortgage lenders will build origination fees into their standard loan products. That includes both new purchases and refis, by the way. So, you’ll need to include these costs in your math when crunching the numbers and seeing if it makes sense financially to refinance your mortgage.
You should also expect to pay an origination charge regardless of the type of home loan you use. Even mortgages that present more flexible down payment options — like VA or FHA loans — typically require an origination fee unless otherwise negotiated.
Mortgage providers are not alone here — many types of lenders, including auto loan and personal loan companies, include origination charges at the outset of the customer relationship.
How much should your origination fee be?
Every lender will assess these charges differently, so you could see origination fees fluctuate significantly as you shop around for a mortgage. In some cases, mortgage providers may even waive these costs entirely or build it into the rate.
How much are loan origination fees?
Origination fees usually reflect a fairly small percentage of the loan amount. On average, expect to pay 0.5%-1.0% of your loan’s principal to cover your mortgage origination charge.
Let’s say you take out a $400,000 mortgage to buy a new house. In that case, you probably wouldn’t spend more $4,000 on the origination fee. In all likelihood, you may actually wind up paying a bit less than that.*
Some loan types have strict regulations regarding how much a mortgage provider can charge customers for processing fees. For instance, lenders cannot legally charge more than 1% of the mortgage loan amount on a VA loan.
Can you avoid paying an origination fee?
Despite what you may have heard, lenders can never technically “waive” an origination fee. There’s always a cost to originate a loan and get it to funding.
What mortgage lenders can do, however, is build that fee directly into your mortgage rate. This approach would then create a premium that you the borrower pays off during the course of the home loan. So, while you can’t remove an origination fee entirely, you can spread out repayment rather than cover the whole expense all at once.
Those payment options can make an origination fee a useful negotiating tool. When looking at the latest mortgage rates, vetting lenders and finding the best loan terms available, it may be worth asking if this fee can be restructured to give yourself more financial flexibility.
If your lender agrees to these terms, be sure to carefully review your loan quote to spot other charges that might be higher than anticipated. A mortgage provider may offset any changes with the origination fee by increasing costs elsewhere — such as setting a higher interest rate.
You could also attempt to negotiate with the seller and have them pick up the tab, so to speak, for your loan processing fees. However, because the buyer normally pays these expenses, you may face an uphill battle with that particular conversation.
How to lower your origination fee
Even if your lender is unwilling to remove the origination charge entirely, they still might lower it for you. It never hurts to try and negotiate better loan terms with your lender. Origination fees, interest rates, down payment options — they’re all negotiable. That’s why it’s so important to check with multiple mortgage providers before agreeing to any home loan.
Origination fees vs. other closing costs
An origination charge is just one of many closing costs you’ll need to pay as a homebuyer. When budgeting for a purchase, you need to think about every expense, not just the down payment and your monthly mortgage payment.
Here’s how origination fees could stack up against other closing costs. For our purposes, we’re assuming the loan amount is $400,000 — after the down payment — for a home located in Chicago:
1% of the loan amount ($4,000)
Government recording charges
As you can see, your origination fee may wind up being the single most-expensive line item on your closing disclosure. All the more reason to try and work with your lender on lowering it — or removing it completely.
Keep in mind that the above itemized list does not necessarily cover all closing costs you’ll have to pay as a buyer. Furthermore, your specific loan terms, including closing costs, will change according to your lender, location, type of loan and other factors. This just gives you a rough idea of how much origination fees will run you in comparison with other routine closing costs.
Origination fees are some of the most common — and expensive — closing costs you need to pay when buying a house or refinancing your mortgage. They’re pretty standard charges in the mortgage lending industry, so you should be prepared to pay this expense when closing a new loan.
Even if your lender does charge an origination fee, you may be able to negotiate it down to a lower amount. Your lender might even restructure your loan to build the fee into a higher interest rate.
Because people focus so much on the down payment and mortgage when calculating housing costs, it’s easy to overlook this expense. But you should look at every charge — big or small — to be sure you have the funds needed to close on a new house. When in doubt, speak to a mortgage expert who can give you a good idea how much you’ll spend on closing costs. It’s worth the peace of mind.
*Sample scenario is provided for educational purposes and is not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard.
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