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When you buy a home, you'll probably need to come up with a down payment. But there are other costs you'll need to pay, too. For example, you might need to pay what's called an "origination fee." In this guide we'll explain why you have to pay an origination fee on your mortgage, and how much can you expect to be charged.
What is an origination fee?
An origination fee is an up-front payment charged for establishing a new loan or account with a broker or bank. When the fee is for a home loan, it is called a mortgage origination fee.
Why origination fees are charged
To understand origination fees, you need to understand the role of a loan originator. These professionals are also known as loan officers or mortgage brokers.
Loan originators go between the borrower and the bank to help negotiate mortgage terms. A mortgage origination fee is payment to the mortgage originator for their work. The fee is only paid if and when the loan is actually funded.
While many brokers charge origination fees, some do not. If you don't want to pay an origination fee, look for a fee-free mortgage broker.
How much is the typical mortgage origination fee?
Loan origination fees are usually a percentage of the total loan amount. They usually fall between 0.5% and 1% of a borrower's mortgage. Some factors that can determine the size of your fee include:
- Who you work with
- The size of your mortgage
- The complexity of your home loan
- Your credit score (which influences the complexity of your loan)
If you're taking out a smaller loan, you may find that your origination fee is more than 1% of your loan total. This is because smaller loans often require the same amount of work to process as larger ones. A larger percentage ensures your loan originator is paid fairly for their work on your loan.
Your mortgage lender must tell you what your origination fee will be in advance. In fact, this information can typically be found on a loan estimate. Origination fees usually cannot increase at closing.
Negotiating a lower origination fee
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. The most common way to do so is to agree to a higher mortgage 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 long-term, you're probably better off paying an origination fee and keeping your lower interest rate. Among other things, a low interest rate can help keep your monthly mortgage payments low.
As with any financial decision, you'll need to run the numbers to see which option makes the most sense for you.
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