Loan origination fees are commonly found in mortgages, but what are they? And can you avoid paying them? Read our guide to learn answers to these questions and more.
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What Is a Loan Origination Fee?
When you are getting a loan, there will be many terms that may sound foreign to you. One of these is the loan origination fee. But what are these these and why do they matter to you? Read on to find out.
A loan origination fee is the upfront fee a lender charges to process and facilitate a loan transaction. This fee is often around 1 percent of the total loan amount.
You can check the size of the origination fee on your loan by looking at the Loan Estimate. Your lender is required to give you this document within three days of getting your application.
Look on page 2 of the Loan Estimate under “Loan Costs.” The “Origination Charges” entry is your loan origination fee.
Lenders break down origination charges into several categories. These include:
- Application fees
- Origination fees
- Underwriting fees
- Processing fees
- Rate-lock fees
What mortgage lenders call these fees isn’t as important as the total amount.
Loan origination fees are sometimes also called mortgage points, which are different than discount points. Discount points are upfront fees the borrower may pay to get a lower interest rate.
What They Cost
A typical loan origination fee is 1 percent of the loan amount. So on a $200,000 loan, the origination fee might be $2,000.
This is not set in stone, however. The loan origination fee is basically a commission paid to the loan officer. Like other commissions, it’s negotiable.
Covers Processing Cost
The loan origination fee may seem questionable, but loan officers often don’t work on salary. The loan origination fee compensates the loan officer for the work of processing and facilitating your loan.
Doing so requires the loan officer to pay for some costs, such as pulling your credit report. The loan origination fee covers these costs.
Tip: Keep in mind that you the borrower are paying the loan origination fee. So the loan officer is working for you. As the customer, you can ask for and expect good service.
Negotiating a Loan Origination Fee
Just because a loan is bigger doesn’t mean it requires more work or expense to process. For instance, processing a $300,000 loan is essentially the same as processing a $150,000 loan.
But if the loan origination fee is 1 percent, the $300,000 loan would cost $3,000. The $150,000 loan would cost just $1,500.
For larger loan, say, $450,000, the difference is even larger. What this means is that you may be able to negotiate the size of the loan origination fee. This is especially true on larger loans.
They Are Negotiable
On that $300,000 loan, you may be able to ask the loan officer to charge only 0.5 percent instead of 1 percent. You’d save money and the loan officer would earn the same as on a smaller loan that required a similar amount of work.
This may not always work. If your loan is non-standard, such as having a balloon payment or a term of more than 30 years, the loan officer is likely to want the full 1 percent.
Only on Stable Loans
You may also have trouble negotiating a lower loan origination fee if your credit score is marginal. When a loan is seen as riskier, the loan officer is less likely to accept a lower fee.
Some loans have a cap on the loan origination fee. Qualified mortgages backed by Fannie Mae and Freddie Mac mortgages generally can’t charge more than 3 percent in loan fees.
Loans backed by the Department of Veterans Affairs can’t charge more than 1 percent. And some lenders waive the fee altogether.
How to Avoid Loan Origination Fees
Loan officers have other ways to get paid besides loan origination fees. If your loan rate is above-market, for instance, the loan officer may be able to generate a fee by selling the loan to an investor.
This means that the loan officer may waive the loan origination fee if you agree to a higher annual percentage interest rate. If rate is high enough, you may be able to get enough fee credits to pay for all the closing costs and get a zero-cost loan.
Higher Interest Rates
Some lenders do not charge origination fees on any loans. However, the lender has to bring in money, of course. A loan with no origination fee will likely have a higher interest rate to make up for lack of fee.
In most cases, you can’t include the loan origination fee in the total loan amount. You’ll have to pay the loan origination fee upfront at closing.
Ask the Seller to Pay
If you are short on cash, you may be able to get the seller to pay the loan origination fees and other closing costs. You can do this by offering a higher purchase price in exchange for the seller paying these fees.
However, using seller concessions to cover loan origination fees only works if the property you are buying will appraise for the higher price. Make sure the appraisal is high enough before seeking this deal.
The loan origination fee is one of the larger closing costs. It is negotiable and varies between lenders. So it is an opportunity to save money when taking out a mortgage loan.
But the loan origination fee is just one cost of borrowing money. You can also shop around and possibly save money on title insurance and appraisal fees, for instance.
Consider the Tradeoff
And a loan with a lower origination fee may not always be the least expensive option. A loan with no loan origination fee but a higher interest rate may cost more in the long run than one with an origination fee and a lower interest rate.
If you are taking out a loan on a property you expect to sell in a few years, you may be able to save money by agreeing to a higher interest rate. The resulting credit from your lender may cover all the loan fees, including the origination fee.
Get Multiple Bids
To make the best decision on a home loan, get bids from three or so different lenders. Compare total loan costs from each, including the origination fee.
Include the estimated interest costs you’ll pay for the period during which you plan to pay on the loan. Looking at the total cost including interest and loan origination and other fees is the way to identify the least expensive option.
Can You Avoid Paying Loan Origination Fees?
Now that you know what loan origination fees are, you can be mindful of how they affect your total cost structure. Using our methods above, you may even be able to save money while doing so.