What Is An Origination Fee On A Loan?

If you’ve ever taken out a personal loan or mortgage, you may be familiar with an origination fee. It’s a fee that most lenders charge on various loans to cover the expenses associated with processing and granting loans to their clients.

These fees can vary by lender and loan type, so understanding how they are charged—and their impact on the overall cost of the loan and the monthly payment— is imperative to making an informed decision before committing to a loan or mortgage.

How much is a loan origination fee?

Origination fees vary by lender and loan type. They can be charged as a flat fee or a percentage of the loan amount. For personal loans, this fee is typically between 1% and 10% of the principal loan amount. Mortgage origination fees are normally between 0.5% and 1% of the total loan amount.

How do loan origination fees work?

Origination fees are charged in addition to interest and other loan fees. They are paid by the borrower and are intended to cover any expenses incurred by the lenders when processing loan applications—including any costs associated with pulling a borrower’s credit report, verifying their income, valuing any collateral involved, and creating loan documents.

How lenders set origination fees

Origination fees vary by loan type and lender, but they can also be based on the borrower’s credit score, assets, liabilities, income, or location. Some lenders, such as LendingClub, determine personal loan origination fees based on the borrower’s credit. Its fees range from 1% to 8%.

OneMain Financial, on the other hand, charges origination fees as a flat amount or percentage of the loan amount, depending on the state where the loan originated.

How to save on origination fees

You can save on origination fees by shopping around for lenders with lower fees—or lenders that do not charge any origination fees, such as LightStream. Borrowers can also try negotiating with the lender for a lower fee (or to waive the fee altogether). However, lenders may in turn charge higher interest rates or other processing fees if they waive the origination fee on a personal loan.

If you’re buying a house and taking out a mortgage, you can try to save money by requesting concessions from the lender that would either waive or cover the origination fee.

How to pay origination fees

Options for paying origination fees will vary by lender but, in general, they can be added to the loan amount and financed, deducted from the original loan amount, or paid for in full upfront for personal loans.

Here is an example of how these three scenarios would work:

*When the origination fee is added to the principal loan amount and financed, you will incur additional interest over the life of the loan and your monthly payment will be slightly higher.

Mortgage origination fees are typically due at closing and are reflected in the loan estimate and closing disclosures that must be provided to the borrower before the loan closing date.

Here are some options for covering these costs.

• Paying upfront. You can choose to pay the fees in full at closing.
• Financing the fee (“rolling” it into the mortgage). This option adds the costs to the total loan amount and spreads the fee over the life of the loan. Interest will be charged on the fee, slightly increasing the monthly payment.
• Request the seller to contribute. Buyers can ask the seller to cover the origination fee.
• Lender or builder credits and incentives. If the loan is financing new construction, buyers can qualify for assistance from the mortgage lender or the homebuilder. These incentives can offset the origination fees and other mortgage closing costs.
• Assistance Programs. In some areas, there are closing cost assistance programs available to buyers who meet certain income requirements.

Other loan fees to consider

In addition to origination fees, there are several other fees borrowers need to be aware of and consider when applying for a personal loan or mortgage. Here is a breakdown of some of the most common fees:

Application fee

Lenders often charge fees to process your application. This fee may be refundable if the loan closes and may be applied to other costs or fees (depending on the lender’s policies).

Credit check

This fee is often paid at closing if it isn’t already included in the application or origination fee. This covers the lender's cost of pulling your credit report and evaluating your creditworthiness.

Appraisal fee

Borrowers taking out a mortgage must pay for a home appraisal to determine the value of the property that will be financed (and, therefore, used as collateral for the loan). An independent appraiser is required and must be paid for their services.

Inspection fee

Lenders require an inspection of the home being purchased. Buyers are typically required to pay this fee upfront, before the loan is processed and closed, to ensure the property is in good shape, doesn’t require major repairs, and meets the lender's standards.

Mortgage insurance

All Federal Housing Administration (FHA) loans require lenders to pay private mortgage insurance (PMI), including an upfront premium, typically paid at closing, plus monthly premiums.

Mortgage funding fees

U.S. Department of Agriculture (USDA) loans and Department of Veteran Affairs (VA) loans both charge upfront fees (called “funding” fees) that are paid at closing. These fees are typically a percentage of the loan principal amount.

Title insurance

Lenders require the purchase of a title insurance policy to protect against any other claims on the property after the loan closes. Title insurance is typically paid by the buyer, but the cost can be negotiated so that it’s paid by the seller or builder.

Attorney fees

Most states require mortgages to be closed by an attorney. This fee pays for their services.

Prepaid mortgage interest points

Buyers can “buy down” their interest rate by prepaying for mortgage points at closing. While this is not required, it can lower the interest rate and save the borrower money over the life of the mortgage.

Homeowners insurance

Buyers may be required to pay their first homeowners' insurance premium before or at closing. Some lenders may require payments for a full year’s worth of insurance premiums.

Property tax

Buyers are usually required to prepay a portion of the year’s property taxes at closing, although the exact requirements are determined by the jurisdiction where the property is located.

Recording fees and taxes

Mortgage transactions must be recorded with the county or local authority where the home is located. The buyer typically pays this fee.

Real estate agent commission

Most real estate agents work solely on commission. This fee is a percentage of the home’s sale price, and it is split between the agent and broker for the seller and the agent and broker for the buyer. This fee is negotiable; while it is usually paid for by the seller, a federal lawsuit is changing the future of real estate commissions. The changes, set to go into effect in mid-July, mean that sellers will no longer be responsible for paying both their agent and the buyer's agent. Buyers that want representation will have to pay their agent separately or negotiate for the seller to pay.

TIME Stamped: It’s important to understand the impact of origination fees on your borrowing costs

Understanding origination fees, how to pay them, and how to save on them is key to making an informed decision about the loan you are applying for. As stated, most lenders, though not all, charge this fee on personal loans and mortgages. It’s up to borrowers to do their research and understand the consequences of paying an origination fee: Namely, how it affects the overall cost of the loan and their monthly payment.

Frequently asked questions (FAQs)

Is an origination fee worth it?

It depends, but loans that do not have an origination fee typically have higher interest rates or charge other fees. Borrowers can shop around for lower rates or lenders that waive these fees. However, it’s important to compare each loan option's annual percentage rate (APR), which more accurately reflects the total cost of the loan.

Can you avoid the origination fee?

You can avoid the origination fee by looking for a lender that does not charge one—or by waiving it. However, when a lender doesn’t charge an origination fee, they may charge a higher interest rate—or other fees—that could make the loan more costly in the long run. Hence, it’s important to understand the overall cost of each loan to accurately compare them.

What is included in an origination fee?

Origination fees cover the cost of processing and administering the loan.

Are origination fees negotiable?

Possibly. Some lenders will negotiate the origination fee but not all.

How can I avoid paying origination fees?

Not all lenders charge origination fees. Therefore, it is possible to avoid paying a fee by working with a lender that does not charge one. Borrowers can also negotiate to waive the fee or request concessions from the lender or seller.