The home hunter’s guide to loan origination fees
Quick insights
- Loan origination fees are a standard cost when securing a loan, typically around 0.5% to 1% of the loan amount, covering processing and underwriting expenses.
- These fees are usually paid at closing, but can sometimes be negotiated, rolled into the loan or covered by the seller or assistance programs.
- Planning ahead by budgeting for these fees and comparing lenders can help you manage costs and potentially reduce your financial burden.
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 is the loan origination fee.
But what is an origination fee and who pays it? Do you get your origination fee back? Is it something you can avoid? We’ll explain it all.
What is an origination fee?
An origination fee is a charge from a lender to process a new loan application; essentially, it is your payment to them for executing the loan. It covers processing, underwriting and funding.
While mortgage loans typically come with origination fees, they aren’t the only types of loans that require them. Auto loans, personal loans and even student loans charge origination fees as well, typically expressed as a percentage of the overall amount that you’re borrowing.
Budgeting for fees and closing costs well in advance can help homebuyers prepare. To get started, you can ask your lender to give an estimate of how much your fees will be by getting preapproved 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.
Why do home lenders charge origination fees?
Mortgage lenders charge origination fees to cover the costs associated with processing and setting up your loan. Think of it as the lender’s way of being compensated for the time, effort and resources they invest in getting your loan approved and ready to go.
These fees cover the following:
- Administrative costs: Origination fees help cover the behind-the-scenes work that goes into your loan application. This includes tasks like reviewing your credit history, verifying your income and assets and ensuring all the documents needed for your mortgage application are in order.
- Loan customization: Every borrower’s situation is unique, so lenders often tailor loans to fit your needs. This customization—whether it’s adjusting terms, rates or loan structures—requires additional effort, which the origination fee helps offset.
- Compensation for loan officers: Loan officers and other staff need to be paid for their work.
- Risk assessment: Lenders take on a certain level of risk when they approve a loan. Part of the origination fee helps cover the costs of evaluating that risk, such as running credit checks and appraisals.
- Operational expenses: Running a lending business involves overhead costs like office space, technology and regulation compliance. Origination fees help lenders maintain their operations and continue offering loans.
How much are loan origination fees?
Loan origination fees vary by lender and usually depend on how much you’re borrowing, as well as the type of loan. Mortgage loans tend to have lower origination fees than other types of loans (with the exception being federal student loans, which have set origination fee rates).
Otherwise, loan origination fees are determined based on the following factors:
- Loan term: In general, the longer the mortgage term, the lower the origination fees, since they generate more interest and are therefore more lucrative for the lender.
- Size: The more you borrow, the higher your origination fee, since it is a percentage of your total loan amount.
- Lender: Lenders charge different interest rates to attract borrowers; similarly, they may offer different origination fees, too.
- Your creditworthiness: In some cases, if you have a high credit score, you may be able to qualify for lower loan origination fees.
On average, a loan origination fee is about 0.50 to 1% of your mortgage. So, if you have a $100,000 mortgage, your loan origination fee will likely be around $1,000.
When do you pay your origination fee?
Most of the time, origination fees are paid at the time of closing, along with your down payment and other closing costs.
You will find out how much you are expected to pay for an origination fee when you receive your closing disclosure around three days prior to closing.
Can a loan origination fee be waived?
A loan origination fee may be waived or reduced. Here are a few ways to do it:
- Ask your lender to waive or reduce your fees upfront: Your lender may be willing to waive your fees (or reduce them) if you show that you are preapproved 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. However, 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.
- Roll the fee into the loan’s closing costs: Many lenders also let borrowers roll their closing costs, including the origination fee, into the loan. This can work well if you don’t have the cash on hand to cover the costs.
Do you get your origination fee back?
Unfortunately, origination charges for a home loan are typically non-refundable. Once you pay this fee at closing, it’s non-refundable because it compensates the lender for the work they’ve already done to process and approve your loan.
Like other closing costs, the origination fee is a one-time payment that’s part of the cost of securing your loan. Once the loan is finalized and the fee is paid, it’s considered earned by the lender.
The only time you might get a refund is if there’s an error or issue on the lender’s part, but this is uncommon. For example, if the loan doesn’t close due to a mistake by the lender, they might refund the fee as a goodwill gesture, but this isn’t standard practice.
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.
Tax implications vary by situation. Consult with your tax professional to understand how this may apply to you.
How to pay loan origination fees
Fortunately, you have several options for covering these costs. They include:
- Direct payment at closing: You can pay the fees upfront as part of your closing costs. This is a straightforward option and likely the simplest, as long as you have the cash available.
- Mortgage payment: You can roll the origination fees into your total loan amount to reduce your upfront costs. Keep in mind that doing this increases your monthly payment and the total interest you’ll pay over the life of the loan.
- Seller’s concession: You may be able to negotiate for the seller to pay a portion of your closing costs, which can include the lender origination fees.
- Assistance programs: Government or nonprofit programs may offer grants or loans to help homebuyers cover closing costs. Chase’s homebuyer assistance calculator may be able to help you find relevant programs.
- Manufacturer incentives: For certain loans, like those for new cars or manufactured homes, the manufacturer might offer to pay the fees.
- Lender credits: The lender might agree to cover your origination fees through lender credit in exchange for you accepting a higher interest rate.
- Lender discounts: Some lenders offer discounts on origination fees for qualifying borrowers, such as those with excellent credit or existing customers.
Loan origination fees vs. closing costs: Key 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.
That is, you will pay your loan origination fees at closing, but they won’t be the only fees included in your closing costs.
Other closing costs may include the appraisal fee, credit report fee and home inspection fee, to name a few. The average closing cost amounts to about 2–5% of the total mortgage, with origination fees taking up just a small portion of that.
What is the difference between loan origination fees and points?
While loan origination fees are those charged for processing and setting up your loan, discount points are what you pay to lower your interest rate. Discount points are an option for those who want to prepay interest to reduce monthly payments over the life of the loan.
In summary
Overall, loan origination fees are a common cost associated with closing a home sale or a refinance. These fees are usually about 1% 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.
