When you’re in the market for a mortgage, many factors go into choosing the appropriate home loan and lender for your situation. One factor you need to be aware of when shopping for a mortgage is the variety of fees a lender charges. And one of those fees is the loan origination fee.
In this article, we’ll give you an overview of origination fees so you have a better understanding of what you’re paying for when buying a home with a mortgage.
What Is An Origination Fee?
An origination fee is a one-time fee many lenders charge to offset the administrative costs of processing a loan.
Borrowers pay the fee to cover the lender’s overhead expenses for collecting documents, filing paperwork and underwriting the mortgage. Lenders use the funds collected from origination fees to help improve their liquidity and continue offering loans to prospective borrowers.
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How Does A Mortgage Origination Fee Work?
Origination fees typically cover a range of lender costs, including processing your loan application, underwriting the loan – which involves verifying everything from your income and assets to your job history – and preparing your mortgage documentation.
The fee is a percentage of the total loan amount and is represented as origination points by the lender. The amount of points you’re charged will vary by lender, but one point typically equals 1% of the total loan amount. For example, if your lender charges 0.75 points on a $200,000 loan, your origination fee will be $1,500 or 0.75% of the loan balance.
Origination Points Vs. Mortgage Discount Points
Origination points are different from mortgage discount points. You may see a charge for mortgage discount points in your closing costs, but discount points are a form of prepaid interest.
You’ll find any discount points and origination fees under the “Origination Charges” section of your Loan Estimate.
How Much Are Origination Fees On A Mortgage?
Origination fees typically range between 0.5% and 1% of U.S. mortgage loans.
Some lenders split their origination fees into a processing fee (the cost of taking your application and collecting paperwork) and an underwriting fee (the cost of an underwriter reviewing your mortgage application for approval). Other lenders combine all services into one fee. If a lender you’re interested in splits their fees, add up the percentages to ensure an “apples to apples” comparison of potential lenders.
The origination fee is just one component of your overall closing costs. When comparing fees charged by lenders, you should know that lenders must publish two rates: the base interest rate and the annual percentage rate (APR). Use this information to compare lenders and help yourself make an informed decision.
The annual percentage rate is the base interest rate plus the loan’s closing costs. The bigger the difference between the base rate and the annual percentage rate, the more the lender charges in closing costs and fees.
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6 Ways To Minimize Loan Origination Fees And Closing Costs
Although most lending institutions require borrowers to cover loan origination fees and closing costs, there are strategies borrowers can use to reduce origination fees and closing costs.
1. Negotiate Down
If a lender really wants your business, they may be more open to negotiating the origination fee. If a loan officer suspects your mortgage will close and knows you’re considering multiple loan offers, you may have more leverage to negotiate lower fees.
A lender may be willing to lower their price to earn your business if you have a strong credit score and enough assets and income.
2. Shop Around
Another strategy is to shop around and compare lenders. Use APR to determine the total cost of each loan offer and compare them to find the best deal. Working with a mortgage broker can make the comparison process easier. A broker can find multiple lenders that offer lower APRs.
When shopping around for different mortgage rates, be sure to compare similar loan options. The rate will be different on a 30-year fixed home loan than a 5/1 adjustable-rate mortgage (ARM).
3. Get Lender Credits
You can opt for lender credits to lower your closing costs. Lender credits act like closing cost assistance from your lender. They lower your closing costs in exchange for a higher mortgage rate.
A lender credit is the reverse of a discount point. Borrowers get a lower interest rate in exchange for higher closing costs with discount points. One discount point equals 1% of the total loan amount, but you can buy points in increments of 0.125%.
Something else to note about lender credits is that you’ll pay more on the loan over time. This approach is usually better suited for borrowers who don’t plan to live in a house for long.
4. Ask For Seller Concessions
Sometimes you can negotiate with the seller and get them to pay for certain closing costs, which may include your origination fee. Seller concessions must be added to your purchase agreement to use this strategy.
But this approach has a few drawbacks. First, sellers may hesitate to accept an offer that asks them to pay a bunch of fees. And you may not get as much in concessions as you think you will. All major loan programs set caps on how much sellers can pay in closing costs.
5. Consider Gift Money
You can get a gift from a family member to cover your closing costs, including your origination fee. Some loans also allow gifts from nonprofit organizations, close friends, labor unions, employers or government agencies.
The money you receive must be a gift. And the donor must indicate in a gift letter that you don’t have to pay them back.
6. Pay Upfront
If you can afford it, it’s best to pay your closing costs, including your origination fee, upfront. Paying upfront has a couple of advantages. First, you’ll know exactly how much you’re spending on your closing costs.
And you’ll also get a lower rate when you pay your closing costs upfront rather than adding them to the interest payment. This approach makes a lot more financial sense if you can do it.
Mortgage Origination Fee FAQs
Here are some additional questions you may be contemplating about origination fees:
When do I pay mortgage loan origination fees?
If your lender charges an origination fee, you pay it at closing along with other expenses, such as the down payment and title costs. In all the excitement of finally reaching the closing table, home buyers, especially first-time home buyers, might overlook their closing costs. Budget for these costs early on to avoid any surprises as you approach the end of your real estate transaction.
Do mortgage closing costs include an origination fee?
Mortgage closing costs include a variety of charges, including origination fees. Your lender also charges for pulling your credit report, making wire transfers, ordering a home appraisal and more. Talk to your lender to get the full breakdown of your closing costs. They’ll be able to provide a list of every included cost.
Can I negotiate a lower origination fee?
Some mortgage lenders will negotiate their origination fees – but not all lenders. You may have more luck trying other strategies to reduce closing costs, such as asking for seller concessions, buying lender credits or getting gift money.
Are there no origination fee mortgages?
You may see a loan advertised as “no origination fee.” However, that doesn’t always mean you’re getting the best deal. While you won’t pay an origination fee, lenders will charge a slightly higher interest rate in exchange for the upfront reduction in closing costs.
With a no origination fee loan, you pay less upfront in closing costs, but you pay more in interest over the lifetime of the loan. It comes down to what’s most important to you.
The Bottom Line
Now that you have a better understanding of origination fees, you can start your mortgage shopping experience knowing what to expect – and be better prepared as you move forward in the home buying process.
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You can get a real, customizable mortgage solution based on your unique financial situation.
Kevin Graham
Kevin Graham is a Senior Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a bachelor's degree in journalism from Oakland University.
