When you buy a home, you'll need to come up with more than just a down payment; you'll also be responsible for various closing costs. One such expense is your mortgage's origination fee. An origination fee is an up-front payment charged for establishing a new loan or account with a broker or bank. It's a form of compensation for the party that helps put the loan in place.
Why origination fees are charged
Also known as loan officers or mortgage brokers, loan originators typically work on behalf of themselves or large banks that provide thousands of homebuyers with mortgages each year. A loan origination fee is paid to the broker or loan officer who facilitates the transaction with the borrower as a commission of sorts, and the fee is only paid if and when the loan is actually funded.
How much is the typical loan origination fee?
The amount of a loan origination fee will vary depending on who you work with, the size of your mortgage, and how complicated your loan is. If you have decent credit and a standard home loan, then your fee is more likely to stay on the low side. On the other hand, if you have poor credit, you might face a higher origination fee, as it might take more work for a broker to get you approved and set up with a loan.
Loan origination fees are typically expressed as a percentage of the total loan amount, and they usually fall between 0.5% and 1% of a borrower's mortgage. However, if you're taking out a smaller loan, you may find that your origination fee is a larger number percentage-wise. This is because smaller loans often require the same amount of work to process as larger ones.
Keep in mind that unlike other closing costs, origination fees are often negotiable. If you're taking out a larger mortgage, then you may be able to work your way down to a lower fee. Also keep in mind that while many brokers charge origination fees, some do not.
Either way, your lender is obligated to tell you what your origination fee will be in advance. This information can typically be found on a loan estimate. Furthermore, origination fees usually cannot increase at closing.
Lower origination fees versus higher interest rates
Though it's possible to negotiate for a lower origination fee, the most common way to do so is to agree to a higher interest rate in return. If you're planning to sell your home or refinance in the near future, then this type of arrangement might work out in your favor. However, if you're planning to stay in your home for an extended period of time and hang on to your mortgage, then you're probably better off paying a slightly higher origination fee and keeping your lower interest rate. As with any financial decision, you'll need to run the numbers to see which option makes the most sense for you.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at firstname.lastname@example.org. Thanks -- and Fool on!
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.