Loan Origination Fee 101: What Is it & Do I Have to Pay It?
Like many others researching the loan process, you may be asking yourself “what is an origination fee?” This financial term is relatively straightforward: it’s a fee that a lender imposes to account for specific processing expenses related to providing a loan. In execution, origination fees can be more complex. They can vary from lender to lender and are subject to certain rules and regulations, therefore it’s best to thoroughly research how origination fees work and how they will affect your loan.
As with other aspects of a loan, it's important to come to the table with all the information you need to make an informed decision about your loan process and the origination fees themselves. This is true from securing loans for your education to getting started on a mortgage and everything in between.
Let’s explore some of the considerations that need to be identified when examining origination fees for your loan.
What is A Loan Origination Fee?
In order to cover the cost of processing a loan, a lender may apply loan origination fees—usually as a percentage of the amount loaned. In large part, origination fees cover the cost of the customer service that the lender provides. After you submit your loan application, the loan officer will keep in touch with you during the process, including identifying any additional information that may be required.
Additionally, origination fees cover several different tasks the lender performs for securing your loan, including procuring background information about your financial situation, arranging documents, verification of information, and cross-referencing for whether your application applies to government programs. The information provided from these tasks is what determines whether you will prequalify for a loan.
Another thing to keep in mind is that loan origination fees may be bundled into one fee, or listed individually. They may have a different label associated with them as well, such as application, processing, or underwriting fees.
How are origination fees determined?
Each lender applies a different set of criteria for determining origination fees. They may consider factors which are related to the loan itself, such as the reason for, length, and amount of the loan. They may also consider factors related to your financial standing such as credit score, credit history, and co-signers if any.
Average loan origination fees may range from 1% to6%, while some may go as high as 8%. They may vary based on your credit score and the duration of the loan. A typical loan origination fee for a mortgage ranges from .5% - 1% of the loan.
Payment options for these fees can include different options. For example, if you had a $100,000 loan and a 5% origination fee, your payment options might include:
- adding the origination fee into the loan for a total loan amount of $105,000
- deduct the origination fee from the amount received for a total loan of $95,000. In this case, be sure that you factor the fee in the loan amount you are requesting
- paying the fee in cash outright, which most frequently occurs with mortgages by including it in the closing costs
Note that some lenders may not give you the option, which highlights the importance of having a prepared list of questions and considerations for your lender.
Be aware that the Federal Trade Commission warns that some entities may try to scam loan seekers by demanding fee payments before you are granted the loan. Legitimate entities clearly outline their fees, which are typically paid to the lender after the loan is approved.
Do I Have to Pay Origination Fees?
When you may be able to avoid it
Some lenders advertise that they have no origination fees. These lenders are likely to factor in the cost of the loan process into other areas of the loan, such as the interest rate. When comparing loans, be sure to check whether the origination fee is or isn’t included in the annual percentage rate or APR.
Some borrowers may avoid this fee if they have excellent credit. However, this may not necessarily be the case since lenders vary in how they choose to implement origination fees.
When you may want to pay it
Although origination fees may add to the cost of your loan, they may not be a deal breaker. Origination fees may be worth paying if you want a lower monthly payment or if the loan has a long period allowed for repayment. For example, if you have an origination fee of $400 and ten years to pay the loan you would only need to pay $40 per year, but if the loan is over four years you would be required to pay $100 a year.
In some cases, these fees may be necessary to get a loan if your credit is not stellar—but paying origination fees helps to secure the loan which ultimately benefits you in the long run. It’s important to note that If your credit falls into the less-than-ideal category, you have options to improve your credit, including getting on track with your spending.
Regardless of whether origination fees are or aren’t part of the loan process, all of the costs and fees associated with the loan should be clearly delineated so you can assess for the total cost of the loan.
Can I negotiate an origination fee?
While you may be tempted to try to negotiate a loan origination fee, lenders are typically fixed in their administration of them. You are best suited to negotiate an origination fee if you are applying for a large loan sum, have a straightforward means of income, and/or have excellent credit.
Since the effort required to process a loan on the lenders part is often similar regardless of loan amount, individuals seeking large loans may pay a smaller percentage. Similarly, individuals seeking a smaller loan may pay a higher percentage.
Ultimately, the loan lender will need to cover their costs as well. As with other loan considerations, you should compare all of the rates and fees associated with the loan to ensure that you are receiving the best deal. To get started with considering loan costs, try out our convenient personal loan payment calculator.
Can Loan Origination Fees Affect your Taxes?
According to the IRS, certain home loan origination fees may be tax deductible, but with stipulations and exceptions. There are times when it is possible for them to be deducted on your taxes using the point system. Specific criteria have to be met in order to take advantage of this deduction. Consult with a qualified tax professional for more information about tax deductions in relation to home loan origination fees.
Questions to Ask Your Lender
It’s important to establish exactly how your lender’s fees are being assessed and administered. Questions to consider asking your lender include:
- Will I have a loan origination fee?
- What options do I have for paying it?
- Does my APR have a loan origination fee included?
- What other fees will be included in my loan?
- How can I reduce my loan fees?
Loan origination fees may add to the cost of your loan, but in some cases, they may work in your favor. Be sure to compare different lenders’ offers and pay attention to the details. It’s important to consider all of the costs when comparing loans, because origination fees may be applied or calculated in different ways.
Ask your lender questions regarding how they apply fees and what payment options are available to you. With preparation, the proper tools, and with the right lender, you can be confident in ensuring that you are getting the best loan for your needs and budget.
Please consult with your attorney, financial consultant/planner, accountant, and/or tax advisor for advice concerning your particular circumstances. The information contained herein is for general informational and educational purposes only and should not be construed as professional, tax, financial or legal advice or a legal opinion on specific facts or circumstances. The information or opinions contained herein should not be construed by any consumer and/or prospective client as an offer to sell or the solicitation of an offer to buy any particular product or service.