An origination fee is a payment associated with the underwriting of a loan. An origination fee is typically a set amount and is typically 0% – 5% of the loan amount.
What is an Origination Fee?
Mortgage loans are a useful method to buy new homes, especially if they carry a higher value than your current one. However, you cannot fully own your home until you finally pay off the mortgage. There has to be an easier way for homeowners to pay for their property. Luckily for you, there is a way – you can file an applicable loan. Before you buy, you need to be aware of a simple term known as the origination fee.
What’s an origination fee, you might ask? In layman’s terms, a loan origination fee is what your lender charges you before you set up any loans. Prices vary depending on the lender, but there is a set amount within the United States. Known as discount fees, they never go over 1% of the money borrowed in a loan. Right before any loan, a lender must charge you this amount to cover the costs of other expenses.
What Do Origination Fees Do for You?
Origination fees pay for several types of services, which include the following:
- Funding (the borrowed money you use for your mortgage)
- Processing (provides the necessary paperwork for your loans)
- Underwriting (verification of your monetary value, which includes income and debt)
Origination fees make it much easier for lenders to process everything all together.
Average Loan Origination Fee
For the most part, an origination fee takes up 0.5% to 1% of any loan amount. Lenders charge this as a means of compensation. While you can attempt to reduce your loan origination fee, it typically results in higher interest payments. By the time you close the deal, these fees are set within advance of your loan.
There is a simple reason why most lenders charge a 1% commission. Whether you want $10,000 or $100,000 for a loan, it requires the same amount of work for the lender. As a result, smaller loans end up with a higher percentage. It’s also how they make their money doing these types of services. If you apply for a $100,00 loan, the lender makes $1,000.
How to Better Understand a Loan Origination Fee
The origination fee definition is straightforward – it covers the costs of the loan process, which makes it easier for all parties involved. When you ask for a mortgage loan, you might use a calculator to add up all the costs. For example, if you have a 30-year fix on a long-term loan, the calculator makes it easier to plan months and years in advance. You should also include interest rates when you perform these calculations with a lender.
Be mindful not to fall for junk fees, which are unnecessary add-ons. They might enclose these fees right before a mortgage closure, which makes it difficult to go back on the deal. It’s not a pleasant situation to be in, especially with out-of-nowhere fees. Make sure your lender lets you know everything upfront.
Helpful Tips on Loan Origination Fees
The average loan original fee doesn’t have to be a costly expense. All you need to do is figure out how to spot junk fees before they catch you off-guard. There are a few things you can do to prevent non-negotiable situations like junk fees.
For starters, a lender is legally obligated to review a loan estimate with you. There are three pages in total, but you need to take a look at the second page. There should be a listing of loan costs, which include origination charges. You can find a percentage of the loan payment, as well as application fees, documentation, and underwriting costs. The reason these fees are expensive is that a lender might only list the origination fee to appeal to buyers. After all, a loan origination fee of $1,000 sounds feasible, but it doesn’t factor in the other expenses.
You do have options available to you, however. Before you apply for a loan, consider your negotiation tactics. You might be able to talk to your lender about lower interest rates.
Are Origination Fees Negotiable?
Origination fees are negotiable. Lenders use profit strategies to gain leverage, but you can stay one step ahead. Negotiations can begin right before official loan estimates. Don’t start anything until you even the playing field; otherwise, a lender can run you over with expensive fees.
Before you proceed, ask your lender about your origination charges. Show them a document from the loan estimate and ask them about all the fees. Make sure your lender gives you responses in writing, so you can use them for further documentation. If a lender demands more money than you are willing to pay, you can use it in court proceedings.
Try to find common ground for reasonable loan fees. If you feel like it’s too expensive, let your lender know; you can try to negotiate for lower rates. Most lenders try to get away with higher fees because most people don’t read the fine print. Hold them accountable with your loan estimates and have available documentation ready. Remember – the higher the loan, the more likely you have to negotiate for smaller fees. It might seem difficult, but you can get your lender to lower the costs.
Other Things to Consider
A loan origination fee is technically part of the closing mortgage costs. Before you finalize your mortgage, make sure you’re comfortable with your origination fees. Don’t let lenders take advantage of you with higher costs. You should consider a few things beforehand.
One negotiation tactic you can try is shopping around with several different lenders. You can ask your current one to match your rate. Otherwise, you can go with the lowest prices. There are also discount points you can apply for. Discount points lower your interest rates with an upfront payment instead. It also allows you to strengthen your mortgage applications. Remember that the stronger your application is, the more negotiation power you have in discussions.
In Summary
Now that you know what’s an origination fee, you can use this knowledge to your advantage. Lenders charge you origination fees right before you finalize your mortgage. However, if you aren’t careful, a lender can force hidden fees. You might think you’re only paying for the origination fee, but you might not notice the other expenses.
Always read the fine print before you apply for a loan. You can negotiate for better deals since a lender is legally required to let you know everything on your expense report. Origination fees are always within 1% of the entire loan. However, the other expenses are up for grabs. With the right negotiation tactics, you can lower the cost of everything else.