What Is a Loan Origination Fee?
A loan origination fee is a fee that the lender charges to underwrite and process a loan. Lenders can either charge the fee as a single fee or have it listed as separate underwriting and processing charges. The fee is typically between 1%-8% of the total loan amount, but the cost will vary from lender to lender.
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Feel Confident About Your Loan Decisions
When taking out a loan, you’re likely to encounter a variety of charges. One of the most common fees is the loan origination fee, which is charged by lenders to cover the cost of processing and approving your loan application. While this fee is standard practice in the lending industry, it’s important to know what you’re paying for and how it impacts your loan.
In this article, we’ll explore what a loan origination fee is, how it’s calculated, and what you can do to minimize its impact on your loan. Whether you’re a first-time borrower or a seasoned pro, understanding this fee can help you make more informed decisions about your loan options.
How Loan Origination Fees are Determined
The price a borrower pays for their fee ultimately depends on the size of the loan. The credit rating, presence of a cosigner, and type of loan can also impact the amount you pay.
Having a high credit score is key in saving the most on the loan origination fee. Not only will the lender be able to give you the lowest fee available, they might even be able to erase the fee altogether. If your credit score isn’t where you need it to be, consider using a cosigner with more established credit to sign up for the loan. A cosigner can bring down the loan origination fee if their credit score qualifies.
When Loan Origination Fees are Due
Borrowers pay the loan origination fee at closing when they pay the rest of their closing costs and sign their final documents. If you want to get an estimate of how much the lender will charge you for the origination fee before deciding on a company, you can apply to be pre-approved for the loan. Once accepted for pre-approval, the document will include an estimation of the loan origination fee.
How Much Are Loan Origination Fees?
The origination fee is typically charged as a percentage of the overall amount—meaning that the fee will differ depending on how much you’re borrowing. Your total amount, credit score, and location are factors the lender considers when deciding on the exact fee.
Mortgage Origination Fee
A mortgage loan origination fee is the fee the lender charges at closing to process and underwrite the loan. It’s usually between .05% and 1% of the total loan amount.
If you’re trying to keep your closing costs low, you may be able to take lender credit in exchange for the origination fee. A lender credit lets you trade a lower closing cost for a higher rate. Instead of paying the fees up front, you’re essentially building it into the overall loan—however, it’s worth noting that you will end up paying a higher total amount for the loan.
Personal Loan Origination Fee
A personal loan origination fee is usually between 1% and 10% of the total loan amount. To determine the fee, lenders examine your credit score, repayment term, loan amount, income—and if applicable—your cosigner’s information.
Personal loan lenders sometimes roll the origination fee into the total loan amount. If you need a flat rate of $30,000 to consolidate your debt, you would request $31,500. The first $30,000 covers the actual amount you need, and the additional $1,500 covers the 5% origination fee.
Student Loan Origination Fee
Student loan origination fees depend on whether the loan is from a federal or private lender. The government’s student aid website notes that federal student loan origination fees are 1.057% for subsidized and unsubsidized loans and 4.228% for direct plus loans.
Many private lenders have gotten rid of them all together. However, while private lenders’ lack of origination fees may initially sound attractive, federal student loans tend to have lower, fixed-rate interest rates.
How to Compare Loans With Origination Charges
The best way to compare loan quotes is to compare the origination charge, interest rate, and annual percentage rate (APR). Comparing origination fees is an important part of the overall decision, especially if you’re looking for the lowest possible closing costs.
Review Multiple Quotes
Shopping around will help you find the best loan for you. A good practice is to ask the loan officer whether they include an origination fee and if it’s negotiable for your situation.
Interview several loan companies to compare the numbers and find the one that fits your needs the best. Make sure the paperwork either has the APR already calculated or includes all of the factors needed to calculate the APR for the loan.
Evaluate the APR
The APR is how much you will pay back over the life of the loan, typically expressed as a percentage. The interest rate, how long you will carry the loan, and any extra fees determine the APR. Borrowers want the lowest APR they can find because it means they’ll pay less in additional fees and interest.
Consider How Long You’ll Have the Loan
How long the borrower plans to carry the loan should matter while considering loan origination fees. The lender may significantly reduce or eliminate the fee in exchange for a higher interest rate.
You could pay less up front to borrow the money but pay more monthly because of the higher interest.
Should You Select a Loan With an Origination Fee?
Whether you should choose a loan with an origination fee depends on your situation. An origination fee might be worth paying if it means a lower interest rate for the life of the loan. Those who only need the loan for a short time might opt for no origination fee but higher payments. This is typically only financially beneficial if you are short on cash or purchasing a home that you intend to sell well before the loan is paid off.
Can You Negotiate a Loan Origination Fee?
A loan origination fee is negotiable in most cases. The higher a borrower’s credit score, the more negotiating power they have to get their origination fee as low as possible. Borrowers can ask the lender if a particular portion of the charge can be waived, like the processing or application fees. They can also ask that the origination fee be waived entirely.
Origination fees are an additional way for lenders to make money, so negotiating might take a lot of work. However, some lenders might oblige, knowing that the borrower would take another loan if the fees are too high.
How to Save On Origination Fees
You can save on origination fees by finding lenders that are willing to negotiate the charge to a reasonable amount or by working with lenders that don’t include them at all.
For home purchases, you can ask the seller to pay a portion of the closing fees. This way, you’ll be able to keep you interest rate as low as possible and avoid the origination fees altogether.