What Is a Loan Origination Fee?

Have you ever been approved for a loan, and then received less money than you were approved for? If so, loan origination fees could be the culprit.

Loan origination fees are the cost a lender charges for processing your loan. These fees, which are usually subtracted from the loan funds or paid at closing, can range anywhere from 0% to a hefty 8% of the loan amount.

The price you pay, often depends on the type of loan you receive. Mortgage loans, for example, typically carry 0.5%-1.0% fees. So, if you borrow $250,000 for a home, origination fees should come in around $1,250-$2,500. Personal loans, on the other hand, can be closer to 8%, so a $10,000 loan could cost you $800 in origination fees.

But if you’re armed with the right information, you might be able to negotiate lower fees or even avoid origination fees altogether.

Why Do Lenders Charge Origination Fees?

Origination fees help lenders cover the various costs involved with making loans. These fees, which can sometimes be avoided, accompany most auto loans, mortgages, personal loans or student loans you apply for.

What is included in loan origination fees? Usually, it’s a combination of the following:

• Processing of the application
• Preparing loan documents
• Conducting credit checks
• Underwriting the loan
• Funding the loan
• Other administrative services

In addition to origination fees, lenders also charge interest on most loans. Wondering what the total cost of fees and interest comes out to? Look at the APR, since it reflects your interest rate plus all other charges.

When Do You Pay Origination Fees?

The timing of when you pay origination fees depends on the type of loan and the lender. You may have to pay the fee when you close on the loan, or the lender may deduct the fees from your loan funds. You can also have the fees rolled into the total amount you borrow, but that means adding additional interest charges to your borrowing cost.

How Much Are Loan Origination Fees?

Loan origination fees are calculated as a percentage of your loan amount, but that percentage can vary across different loan types. On top of that, the fees are often negotiable—especially for large loans like mortgages. Here’s what you can expect for each type of loan:

Mortgage Loans

Mortgage origination fees, which are paid at loan closing, cover a variety of services provided by the lender. Here’s what is included in loan origination fees for most mortgages, at minimum:

• Appraisal fees
• Credit check
• Underwriting
• Title insurance fees

You can find the breakdown of the line-items that make up your origination fee in your loan estimate.

Origination fees on mortgages are usually 0.5% to 1% of the loan amount. While 1% might seem negligible, it’s worth doing the math before getting a mortgage loan.

For example, if you borrow $300,000, which is close to the average loan amount for new mortgages, 1% origination fee would equal a $3,000 expense. That’s $3,000 that could go toward your down payment instead.

Personal Loans

It’s common for personal loans to have origination fees, but the amount varies a lot from one lender to the next. For example, you can find lenders who don’t charge these fees for personal loans, like Discover, while SoFi charges up to 6%. At 6%, your origination fee for a $5,000 loan would come out to $300.

Student Loans

Private student loans don’t always have origination fees, but federal student loans do. Depending on the type of federal loan, you could pay roughly 1% to 4.2% in origination fees.

The amount you owe will be deducted from your loan funds. That means your loan could end up falling as much as 4.2% short of covering your expenses. For a $20,000 loan, that’s a shortfall of $840.

How to Save on Origination Fees

Origination fees are not set in stone. A savvy borrower can get the fees reduced, or even avoid paying origination fees altogether. Here’s how:

• Search for the right lender: Some lenders charge low or no origination fees. You can typically find out whether or not a lender charges these fees by searching their website. Government-funded financing can be a good bet for low origination fees, too.
• Negotiate: Negotiating fees with lenders is key to reducing the cost of borrowing. Make sure you ask the lender to waive or reduce the origination fee and/or the APR, and if you have a better offer from another lender, use it as a tool to help with negotiating.
• Improve your credit: The higher your credit score, the more likely lenders are to approve you for loans with no origination fees (and low APR) or offer flexibility when it comes to lowering their fees.
• Ask the seller to pay: For mortgage origination fees, you may be able to get the seller to pay the cost, especially if you’re in a buyer’s market or the owner is eager to sell.
• Add the fees to the loan: This option is not cost-effective in the long run because it essentially converts your origination fees into a loan and adds interest charges to them, but rolling the origination fees into your financing could make borrowing more affordable up-front.

Note that you could get some help at tax time, too. For home buyers, the IRS may allow you to deduct some of your loan origination fee as home mortgage interest, even if the seller pays the cost.

Should You Get a Loan With Origination Fees?

It’s easy to assume that a loan without origination fees is better than a loan with them. But there are other costs to consider.

Some lenders may offer low or no origination fees while charging extra-high APR. Or they might agree to lower your origination fees, but then increase your interest rate. So if you want to find the most affordable loan, you’ll need to compare all of the costs involved, not just the origination fees.

How to Compare Loan Origination Fees

You can get a lot of information about a loan, including all of the lender’s fees, before you apply. Fortunately, doing a little up-front research makes it easier to find the lowest fees available. Here’s how it’s done:

1. Shop around: Research multiple lenders, including your bank or credit union, to find out what fees they charge. Use their published fees and APR to help you narrow your list of potential lenders.
2. Get pre-approved: Get multiple quotes from lenders who offer pre-approval (which doesn’t hurt your credit), and compare the fees included in each offer.
3. Look at the loan length: A longer loan payment can reduce your origination fees. Longer repayment allows the lender to collect more interest from you. If you want to compare apples-to-apples, consider loan length and keep in mind how much interest you’ll pay overall.

Other Loan Fees

If you’re searching for a loan, don’t forget to look into ALL the fees, not just the origination fee. Some other numbers that could have a big impact on your cost of borrowing include:

• Application fee.
• Late fee.
• Prepayment penalty.
• Annual fee.

Sure, you can take the first loan you’re approved for, but overlooking the various fees could mean regretting your choice. Before agreeing to take on a new loan, review all the expenses to find the best deal available. Your wallet will thank you for the effort!