What Is an Origination Fee?
A mortgage origination fee is an upfront fee charged by a lender to process a new loan application. The fee is compensation for executing the loan. Loan origination fees are quoted as a percentage of the total loan, and they are generally between 0.5% and 1% of a mortgage loan in the United States.
Sometimes referred to as “discount fees” or “points,” particularly when they equal 1% of the amount borrowed, origination fees pay for services such as processing, underwriting, and funding.
- An origination fee is typically 0.5% to 1% of the loan amount and is charged by a lender as compensation for processing a loan application.
- Origination fees are sometimes negotiable, but reducing them or avoiding them usually means paying a higher interest rate over the life of the loan.
- These fees are typically set in advance of the loan execution, and they should not come as a surprise at the time of closing.
Understanding Origination Fees
An origination fee is similar to any commission-based payment. A lender would make $1,000 on a $100,000 loan—or $2,000 on a $200,000 loan—if the lender charged a 1% fee for originating the loan. The origination fee represents payment for the lender’s initial services. It sometimes represents a higher percentage of the loan amount on smaller loans, because a $50,000 loan can require the same amount of work for the lender as a $500,000 loan.
Total mortgage fees from lenders can be compared using a mortgage calculator. These fees are typically set in advance, and they suddenly increase at closing. They should be listed on the closing disclosure.
History of Origination Fees
Lenders often earned exorbitant origination fees and yield spread premiums (YSPs) during the late 1990s to mid-2000s for selling the borrower a higher interest rate. Borrowers with marginal credit or unverifiable income were particularly targeted by predatory subprime lenders. These lenders often charged origination fees as high as 4% or 5% of the loan amount, and they made thousands of additional dollars in YSPs.
The government passed new laws following the 2007-08 financial crisis. These laws limited how lenders could be compensated. Public pressure provided an incentive for lenders to rein in the practices that had made them rich during the housing boom. Origination fees shrunk to an average of 1% or less.
A borrower is often better off paying a higher origination fee in exchange for a lower interest rate because the interest savings over time will exceed the origination fee.
How to Save on Origination Fees
Mortgage origination fees can be negotiable, but a lender cannot and should not be expected to work for free. Obtaining a reduced origination fee usually involves conceding something to the lender. The most common way to lower the fee is to accept a higher interest rate in return.
Effectively, the lender earns its commission from the YSP instead of the origination fee. This is executed through something called "lender credits." They are calculated as negative points on a mortgage. As a general rule, this is a good deal for borrowers only if they plan to sell or refinance within a few years because on longer mortgages what you cumulatively pay in interest will generally outstrip what you would have paid in an origination fee.
You can negotiate to have the home seller pay your origination fees. This is most likely to happen in the event that either the seller needs to sell quickly or is having trouble selling the home. You can also negotiate with the lender to have the origination fee reduced or waived. This may not involve accepting a higher interest rate if, for example, you have shopped around and can present evidence of a better offer from a competing lender.
Also, if the mortgage is for a large amount and long term and you have excellent credit and a safe source of income, a lender may find your business attractive enough to go easy on fees.
Finally, always make sure to look at what exactly constitutes the origination fee. Some lenders bundle other fees, such as application and processing fees, into it. If that is the case, ask to have those bundled fees waived.