What is an 'Origination Fee'

An origination fee is an upfront fee charged by a lender for processing a new loan application, used as compensation for putting the loan in place. Origination fees are quoted as a percentage of the total loan and are generally between 0.5 and 1% on mortgage loans in the United States.

An origination fee is similar to any commission-based payment. If a lender takes a 1% fee for originating a loan, it makes $1,000 on a $100,000 loan, or $2,000 on a $200,000 loan. Customers with large loan amounts often negotiate even lower origination fees, since lenders tend to be willing to make concessions to earn their business. Likewise, because a $50,000 loan often requires the same amount of work from the lender as a $500,000 loan, the origination fee sometimes represents a higher percentage of the loan amount on less expensive loans. You can compare total mortgage fees from lenders easily by using a tool like a mortgage calculator. 

 

Lender Compensation

As of 2016, the origination fee represents the primary way in which a lender gets paid for its services. During the Wild West days of mortgages in the late 1990s to mid-2000s, lenders often earned exorbitant origination fees and yield spread premiums for selling the borrower a higher interest rate than par. In particular, borrowers with marginal credit or unverifiable income were targeted by predatory subprime lenders that charged origination fees as high as 4 or 5% of the loan amount, and then made thousands of additional dollars in yield spread premium.

Following the financial crisis of 2008, the government passed new laws circumscribing how lenders could be compensated, and public pressure provided an additional incentive for lenders to reign in the practices that had made them rich during the housing boom. Origination fees shrunk to an average of 1% or less, and since borrowers in 2016 come armed with much more information about going rates compared to borrowers in 2006, the days of making easy money from yield spread premium are over.

How to Lower Origination Fees

Like many mortgage terms, origination fees can be negotiable. However, because a lender cannot and should not be expected to work for free, receiving a reduced origination fee usually involves conceding something else to the lender. The most common way to lower the origination fee is to accept a higher interest rate in return. Effectively, the lender earns his commission from yield spread premium instead of an origination fee. As a general rule, this is a good deal for the borrower only if the borrower plans to sell or refinance within a few years. Otherwise, the borrower is better off paying a higher origination fee in exchange for a lower interest rate, as his interest savings over time exceed the origination fee.

BREAKING DOWN 'Origination Fee'

RELATED TERMS
  1. Origination Points

    A type of fee borrowers pay to lenders or loan officers to compensate ...
  2. Temporary Lender

    A mortgage lender that sells the loans it originates into the ...
  3. Loan Application Fee

    A fee charged to process an application for a loan, such as a ...
  4. Utilization Fee

    An annual fee assessed by a lender against a borrower. The fee ...
  5. Portfolio Lender

    A company that not only originates mortgage loans, but also holds ...
  6. Good Faith Estimate

    An estimate of the fees due at closing for a mortgage loan that ...
Related Articles
  1. Personal Finance

    How Do Mortgage Lenders Get Paid and Make Money?

    When homebuyers educate themselves on how mortgage lenders get paid and make money, they are more likely to save thousands of dollars on their mortgages.
  2. Personal Finance

    How to Pick the Right Lender When Refinancing a Mortgage

    Refinancing your mortgage has never been easier with the range of lenders and access to information that are available to you.
  3. Personal Finance

    Looking for The Best Mortgage Rate? Follow These 6 Steps

    A step-by-step guide to finding and locking in the best rate for a mortgage.
  4. Personal Finance

    How To Negotiate Your Closing Costs

    Closing costs can't be avoided altogether, but you can lower them. While there are a lot of fixed costs, there are also variable ones you can save on.
  5. Personal Finance

    Mortgage Fees That Can Trash Your Refinance Deal

    Before deciding that refinancing your mortgage at a lower interest rate is a good deal, factor all the fees into your calculations.
  6. Retirement

    When Are Mortgage Lenders Better Than Banks?

    Individuals seeking a mortgage loan should consider factors or circumstances that may make a mortgage lender a better choice than a traditional bank.
  7. Personal Finance

    How to Find the Best Refinance Companies

    From traditional lenders to online loans, here's everything you need to know about refinancing your mortgage.
  8. Personal Finance

    How to Lower Refinance Closing Costs

    Refinancing a mortgage can save you money but it isn't free. There are closing costs associated with a refinance and how much you pay for them depends on you.
  9. Personal Finance

    How to Shop for Mortgage Rates

    Take these five steps to getting the lowest possible rate for your mortgage. Small percentage differences can mean big savings down the line.
  10. Personal Finance

    What Does a Lender Do?

    A lender provides funds to another with the expectation those funds will be repaid with interest.
RELATED FAQS
  1. When is an underwriting fee too high on a commercial loan?

    Learn about underwriting fees and when they're too high. If the underwriting fee exceeds 2% of the total loan size, the fee ... Read Answer >>
  2. What’s the Difference Between a Mortgage Lender and a Mortgage Servicer?

    Buying a home is an exciting and confusing process. Once the loan is secured, it's important to know who gets the payment: ... Read Answer >>
Trading Center