The home hunter’s guide to loan origination fees
If you’re looking to purchase a home or are considering refinancing, you’ll want to be aware of the different fees that come up. One of the most common are loan origination fees. But what are they? In simple terms, when a borrower takes out a loan, the lender will charge a percentage to cover the cost of processing and underwriting your application.
Now that you know what these fees are, you may be wondering how much they will cost you — and if you can avoid them altogether.
How much are loan origination fees?
Loan origination fees vary by lender and usually depend on how much you’re borrowing. On average, a loan origination fee is about one percent of your mortgage. So, if you have a $100,000 mortgage, your loan origination fee will likely be around $1,000. Saving up for fees and closing costs well in advance of becoming a homebuyer should be a part of your overall budget so you’re covered when they’re finally due.
To get started, you can ask your lender to give an estimate of how much your fees will be by getting prequalified for a mortgage. This will give you an idea of what’s to come and can give you a leg up during negotiations with other lenders while you shop for loans.
Can a loan origination fee be waived?
A loan origination fee may be waived or reduced, and here are a few ways to do it:
- Ask your lender to waive or reduce your fees upfront. Your lender may be willing to do it if you put up a sound argument or if you show that you are prequalified for a loan with smaller fees at a different lender.
- Take a higher interest rate. Your lender may be willing to waive or reduce your fees if you are willing to take a higher interest rate. You may decide it makes more sense to pay the fees instead.
- Ask your seller to cover the fees. Depending on the market, the seller may be willing to cover your loan origination fees. They are more likely to agree in a buyer’s market — meaning there are more houses for sale than there are buyers — so the seller may agree to these terms to quickly sell their home.
Are loan origination fees tax deductible?
The IRS classifies loan origination fees as points. Points are considered prepaid interest and can be used for tax deductions. This is true even if the seller agreed to pay them for you. Always make sure to double check your local laws and consult with your tax professional to confirm that these fees are deductible in your unique case.
Loan origination fees vs. closing costs: Identifying the differences
A simple rule of thumb to keep in mind is that loan origination fees are closing costs, but closing costs aren't exclusive to loan origination fees. You will pay your loan origination fees at closing, but they won’t be the only fees included in your closing costs: others include private mortgage insurance, appraisal costs, and property taxes (just to name a few).
What we’ve learned
Overall, loan origination fees are a common cost associated with closing a home sale or a refinance. These fees are usually about one percent of your overall loan, and you may be able to waive them depending on your lender. As long as you plan ahead and incorporate loan origination fees into your overall homebuying budget, you’ll be well on your way to buying your new home.