What Is an Origination Fee on a Home Loan?

When closing on your dream home, you may encounter a variety of expected and unexpected fees. One fee that the mortgage lender will charge is an origination fee. These fees, also called mortgage origination fees, are charged by a lender to process a new loan application. Lenders charge a fee as compensation for executing a loan. They typically range from 0.5% to 1% of a mortgage loan. Read on to understand origination fees, including options to cover this additional cost. 

What Is a Mortgage Origination Fee?

An origination fee is a charge imposed by lenders at the beginning of a loan to cover the cost of processing and underwriting the loan. Origination fees, sometimes called discount fees or points, pay for lenders' services in preparing a mortgage, such as processing, underwriting and funding.

What Is the Difference Between Origination Fees and Points?

Origination fees and points are different terms for the same fees. A point is 1% of the total mortgage loan. So if a lender says the origination fee is one point, it means it's 1% of the total loan value. That means for a $300,000 mortgage, a one-point origination fee will be $3,000. A lender also may refer to origination fees as a percentage of 0.05% or more. 

Why Do Lenders Charge Origination Fees?

Lenders charge origination fees to compensate for the time and effort spent processing loan applications and to cover administrative costs. Lending is a business, and while lenders also make returns on interest, they use origination fees to cover upfront expenses related to employees' time for loan processing. 

While lenders would charge exorbitant fees to certain borrowers, especially those with low credit scores in the 1990s and early 2000s, new laws after the 2007-2008 financial crisis prevented lenders from these predatory practices. Now, the fees only cover actual costs. 

How Does the Origination Fee Work?

An origination fee covers the costs of applying for and processing a mortgage. You must pay these fees when you close on the property and secure the mortgage. You have different options for paying the origination fees based on the lender and the type of mortgage. Here's how an origination fee might work:

Suppose you're purchasing a $350,000 home with a $50,000 down payment. The lender charges one point, or 1% of the loan value, in origination fees. That means you'll pay $3,000 in origination fees. You can pay this upfront or consider the other options listed above to cover these fees. 

How Much Can You Expect to Pay in Origination Fees?

The percentage or amount of origination fees can vary from lender to lender. Generally, the fees range from 0.5% to 1% of the total loan amount. If you find lenders offer fees higher than 1%, consider negotiating or choosing a different lender. 

How to Save on Origination Fees

You can save on origination fees in different ways, from negotiating with the lender and home seller to using incentives, grants or loans. The starting point should be in your mortgage search when you compare interest rates, origination fees and total closing costs. 

Then, consider negotiating with the lender to reduce fees or asking about incentives for borrowers. You can also negotiate with the seller, especially in a buyer's market, and ask whether they can cover the origination fees as part of the purchase contract. Finally, look for closing cost assistance programs that offer additional support through grants, loans or financial aid to qualified homebuyers. 

Ways to Pay Mortgage Origination Fees

You can pay mortgage origination fees in several ways, so if you're feeling overwhelmed, there's support. The simplest — and cheapest — option is usually to pay the fees upfront. That's not possible for many homebuyers, so here are some of the many ways you can pay mortgage origination fees. 

Upfront Out-of-Pocket Payment

You'll write a check or make an electronic payment to the lender to cover the fees in full. This gives you more negotiating power with the mortgage lender and seller and will help you save more in long-term interest.

Rolling Into the Mortgage

You may pay more in the long term, but you'll save on upfront costs. Not all lenders offer this, so it's important to ask whether you can roll the closing costs or origination fees into the mortgage before choosing a lender.  

Seller Contributions

You may be able to negotiate that the seller covers a portion or all of the fees. This is less likely to work in competitive markets, but if you have a strong offer, some sellers will consider this. 

Lender credits

Some lenders may offer credits that can be applied toward the loan origination fees or other closing costs. You could end up paying a slightly higher interest rate in exchange for these benefits. 

Builder or Developer Incentives

If the loan is for a new construction home or a property developed by a builder, you could get incentives to cover a portion of the loan origination fees

Closing Cost Assistance Programs

There may be closing cost assistance programs available based on your location and financial need. These programs include grants, low-interest loans or other financial aid to cover loan fees and closing costs.

Negotiate

While you won't eliminate closing costs with this option, you could negotiate to reduce closing costs, especially if you've gotten more favorable offers from other lenders.

Compare the Best Mortgage Lenders With Low Origination Fees

When comparing the best mortgage lenders, it is important to consider various factors such as interest rates, loan terms, closing costs and customer service in order to make an informed decision that suits your financial needs.

Final Tips on Origination Fees

While closing on a home comes with many additional fees that first-time homebuyers don't account for, these fees shouldn't stop you from purchasing a home. You can negotiate, compare lenders' offers and use assistance programs. Whether this is your first home or a rental property, planning for fees and closing costs can help you save more long-term. Learn more about how to invest in real estate or learn how to buy your first rental property here.

Frequently Asked Questions