Lenders charge origination fees to cover the costs of making loans. These fees can increase your borrowing costs, whether you’re taking out a mortgage, a personal loan or an auto loan.
Before you borrow, it pays to know what an origination fee is, how it can influence loan costs and when to pay one.
[Read: Best Mortgage Lenders.]
What Is a Loan Origination Fee?
Origination fees are typically a flat fee covering the administrative cost for a lender to process your loan, including overhead expenses and other outlying costs, says Kate Gurevich, managing director, Found It Home Loans at Cherry Creek Mortgage in Colorado. “At a very basic level, an origination fee is the fee charged by a lender to process your loan application,” she adds.
And origination fees may not always be labeled as such, says Kimberly Wachtel, corporate compliance manager with Inlanta Mortgage in Wisconsin. “Some examples may include an application fee, an administrative fee, an underwriting fee or a processing fee,” says Wachtel. “They are all considered origination charges, no matter what they are called.”
How Much Should Loan Origination Fees Be?
Origination fees depend on the type of loan and the amount you are borrowing. Here’s how it breaks down by loan type.
Mortgage Origination Fee
How much: A mortgage origination fee is usually about a few hundred dollars and up to 1% of the loan amount, says Gurevich, but it can be higher depending on the lender. There are also some no-origination-fee mortgages, but be sure to confirm that the lender isn’t just calling the origination fee by another name.
Following a 1% guideline for mortgages, a $300,000 loan would have a $3,000 origination fee.
How to pay it: With a home loan, the origination fee is usually paid as part of your closing costs, which can include fees for insurance premiums, taxes, discount points and more. You can either pay closing costs out of pocket or fold them into your loan, but then you will pay interest on them.
Personal Loan Origination Fee
How much: Origination fees for personal loans are at the discretion of the lender, and they vary widely in size. You can certainly find some lenders advertising personal loans with no origination fees, or you could pay up to 6% of the loan or more. Just keep in mind that you should look at the big picture when comparing the overall costs of different loan options. A personal loan with no origination fee might have a higher annual percentage rate.
How to pay it: With a personal loan, lenders may deduct the origination fee from the loan proceeds or allow borrowers to pay the fee upfront. For example, if you borrowed $30,000 and paid a 2% origination fee, the lender would keep $600 and you would receive $29,400.
Student Loan Origination Fee
How much: Private student loans may or may not charge origination fees, and the amount will vary. If you take out a federal student loan, you are guaranteed to pay a loan origination fee since that is set by the federal government.
The federal fee depends on the type of loan and when the loan is disbursed to you. For example, a fee of 1.057% applies to Direct subsidized and unsubsidized loans disbursed from Oct. 1, 2020, to Oct. 1, 2022. The fee for Direct PLUS loans disbursed in the same time frame climbs to 4.228%.
According to the National Association of Financial Aid Administrators, the typical undergraduate borrower in a four-year program pays an estimated $239 in origination fees.
How to pay it: The origination fee for a federal student loan is deducted from the loan proceeds, and you or your school receives the remainder to cover education costs. You pay the origination fee over the life of the loan, which means you pay interest on the origination fee.
[Read: Best Personal Loans.]
Are Origination Fees Negotiable?
Borrowers can often negotiate origination fees for mortgages, auto loans, personal loans and private student loans, but success will depend on how much leverage you have.
For starters, having a strong credit score can put you in the optimal position to get the best rates and terms, including fewer fees, or getting some fees dropped altogether. The other strategy is to pit competitive lenders against each other by shopping around.
“The loan estimate provides the borrower with the details to compare rates and costs between lenders. I always recommend that consumers request multiple loan estimates and do their due diligence,” says Wachtel.
Once you have quotes from a few lenders and look through all of the loan details, you can head to the bargaining table to discuss all the terms, including origination fee as well as the interest rate, says Wachtel.
Show the best comparative quote to your preferred lender and ask if it can match or beat the offer. If the lender wants your business, it might waive a fee or offer some other benefit, such as a lower annual percentage rate.
Should You Choose a Loan With an Origination Fee?
If you’re unsure about whether to pay an origination fee, consider whether doing so could help you achieve your primary goal for the loan.
Homebuyers may choose to pay the origination fee to get a lower interest rate and lower monthly payment. A lower payment could also lead to a lower debt-to-income ratio.
As you weigh your decision, think about your time frame: How long do you need to recoup the origination fee, and how much will you save monthly if you pay it? If you plan to keep your loan long enough to recoup the cost, then paying the fee could make sense.
Loan size also matters. Paying the origination fee on a large loan could add up to thousands in savings.
Say that you need to borrow $250,000 to purchase new equipment for your construction business. You have two loan options to choose from:
— Loan A charges a 2% origination fee and has a 9.99% APR.
— Loan B has no origination fee but comes with an APR of 11.99%.
Both loans have five-year repayment terms. Loan A has a $5,000 origination fee and $68,632 in total interest charges, and Loan B has no fee but costs $15,000 more in interest.
For personal loans, if you can find one without an origination fee, then you should probably go that route. Just be sure that the personal loans with no origination fee also have competitive APRs.
[Read: Best Mortgage Refinance Lenders.]
Compare Loan Origination Fees and Rates Carefully
It’s always best practice to obtain rate and fee quotes from several lenders, and calculate your bottom-line costs before you commit to a loan. That way, you can determine whether you could save with a loan that doesn’t have an origination fee, as well as make sure you’re not overpaying.
“An unscrupulous lender can entice an unsuspecting borrower by advertising a much lower interest rate than the market dictates, then hide various fees in the fine print,” says Gurevich. “It is important for the consumer to always request an official loan estimate when comparing rates, so they can compare an all-in scenario and their APR rather than a verbal quote.”
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Update 03/18/22: This story was published at an earlier date and has been updated with new information.