Lenders charge loan origination fees to compensate themselves for processing your loan. Loan origination fees are always separate from your down payment, which means you’ll need to save more than you originally anticipated to cover the cost of borrowing.
No one wants to be caught off guard when it comes to final loan costs. This is why it’s important to understand how loan origination fees work as well as how to ensure you’re getting the best possible deal.
What is a loan origination fee?
A loan origination fee is a fee charged by lenders in exchange for processing a loan. Loan origination fees typically range between 0.5% to 1% of the total loan amount.
It covers the administrative costs and the customer service associated with processing the transaction. Loan origination fees are just some of the added costs that banks and lenders charge. Other examples include application fees, underwriting fees, and more.
Understanding loan origination fees
Each lender is entitled to price their loan origination fees according to how they see fit. Most origination fees come in between 0.5% to 1%, but in some cases, fees can be as high as 6%.
It’s important to note that these costs are separate from your down payment. You’ll need to put additional money aside to cover loan origination charges and closing costs on top of saving for your down payment.
The exact amount you’ll pay in origination costs depends on a variety of different factors. Sometimes, the loan origination fee includes numerous other closing costs, such as administration fees, application fees, underwriting fees, and more.
But this isn’t always the case. Make sure to discuss the details with your lender to understand exactly what you’re paying for. Here’s a breakdown of loan origination fees to help you understand them better.
When you pay
In most cases, loan origination fees are paid as part of your total closing costs. Closing costs can also include insurance charges, taxes, or other fees. People will usually pay origination fees up front. However, you can also opt to fold them into your loan. Just keep in mind that doing so will result in additional interest charges.
In some cases, lenders may deduct the origination fee from the final loan amount. For example, if you’re borrowing $100,000 and you need to pay $1,000 in origination fees, the lender would keep the $1,000 and give you $99,000.
Loan origination fees are determined by individual lenders and each applies a different rate. That said, the average usually falls within 0.5% and 1% but it can sometimes be as high as 6%.
Loan origination fees can be paid in several ways. However, each lender will have its own policy so it’s important to verify which payment method is suitable for your situation. The most common options typically include:
- Paying the fee in cash upfront
- Bundling the fee with other closing costs
- Folding origination fees into your loan, resulting in interest occurring over time
- Deducting the fee from your funding amount.
Do I have to pay a loan origination fee?
Typically, yes. It’s nearly impossible to avoid paying origination costs. Even when lenders advertise no origination fees, the actual origination charge is usually hidden into interest rates or other processing fees. To understand how much you’re actually paying in origination charges, ask your lender to be transparent about their policies.
Are loan origination fees negotiable?
Although loan origination fees are unavoidable, they are negotiable. You may be able to negotiate your origination charges down if you’re applying for a large loan amount or if you have strong credit.
Sometimes, having a large down payment can also put you in a stronger position for negotiating lender origination fees. Just keep in mind that there’s no guarantee a lender will be willing to negotiate with you, but it never hurts to ask.
Loan origination fees and taxes
Loan origination fees can be a hassle. After saving up for a down payment, these extra costs can really catch you off guard. Fortunately, there are many cases where you may be able to deduct them on your taxes.
Loan origination fees on mortgages are tax-deductible. You may also be able to write off loan origination costs on student loans. Make sure to discuss the details with your accountant or tax advisor. In many cases, you may be able to input loan origination costs when you file with a tax filing software or site.
Tips for getting the best loan origination fee
Nobody wants to spend more than they have to. This is why it’s a good idea to implement the following strategies. They’re free to try out – and at best, they can help you save.
You shouldn’t automatically settle for the first lender to come across. Instead, take the time to do some research. There are many websites and online marketplaces that allow you to compare different offers at once. Another option is to contact a few trusted lenders directly to discuss your options. You should be able to get an upfront quote on interest rates and origination fees.
Don’t expect lenders to automatically disclose all the details of your loan at once. It’s unfortunate, but oftentimes important details can be hidden in the fine print. It’s up to you to do your research and ask the right questions so you know what you’re getting into. Use these prompts as a starting point.
- Will I have a loan origination fee?
- What are my options for paying origination charges?
- How can I reduce my loan fees?
- My credit is good, would you be able to lower my fees because of this?
- If I pay my origination fees in cash, would I qualify for a discount?
- What is included in the loan origination fee? Are there other fees I should know about?
Read loan estimates carefully
Asking questions, reading through lender reviews, and doing your research is a good start. But it’s also critical to take the time to read through the full terms and conditions of your loan.
Lenders aren’t always required to disclose everything upfront or through verbal communication.
It’s your responsibility to look through the fine print to understand exactly what you’re being charged for and to avoid hidden costs.
Get educated about loan origination fees
It’s important to be aware of how loan origination fees can affect your final borrowing costs. A small percentage may seem negligible, but depending on your loan amount origination fees can quickly rack up to be hundreds or thousands of dollars.
It’s a good idea to try and get estimates from at least several lenders to ensure you’re getting the best deal. Having good credit and strong financials will certainly help your case, as you may be able to use these credentials to negotiate reduced fees. In any case, don’t be afraid to ask questions and ensure you have all the information you need to feel comfortable before signing anything.
What are normal origination fees?
Normal origination fees are typically between 0.5% to 1%. However, if origination fees are bundled with other charges the final amount can be as high as 6%.
How can I avoid paying origination fees?
Origination fees are largely unavoidable. However, you may still be able to negotiate down your origination fees. And if that doesn’t work, you can shop around at different lenders to ensure you’re getting the best deal.
Are origination fees legal?
Yes, origination fees are legal, as they cover the lender’s costs for processing your loan.