Origination Fee

Origination Fee
An origination fee is a fee charged by a lender to the borrower at the time a loan is provided to cover the costs of processing the loan.

What is an Origination Fee?

An origination fee is charged to you by a lender when the signing of the loan occurs. Loan origination fees exist for many different types of loans but the term is most often associated with a mortgage, an installment loan used to purchase a house.

Why do you have to pay an Origination Fee?

The origination fee is intended to cover the costs a lender takes on during the loan application process. These costs include paperwork, research into your ability to pay back the loan, the time spent determining the loan specifics, and any other administrative work for the purpose of approving and managing the loan.1

How expensive are Origination Fees?

The origination fee is calculated as a percentage of the total loan amount. Although there is variation between lenders, when it comes to mortgages, the average origination fee is about 1% of the total loan amount. So you can expect to pay $2,500 on a $250,000 mortgage. Still, you should definitely find out what percentage you’ll be paying from your loan officer directly, just in case.2

Can you negotiate an Origination Fee?

You can attempt to negotiate for a lower origination fee, though some lenders will be unwilling to budge. You can try and get a different percentage or adjustment to the total dollar amount you’ll be paying, but your best bet is likely to see if you can get any of the specific components waived. For example, a lender might be willing to forego the application fee if it means closing the deal. You can also attempt to work with other lenders, when possible, and see which lender will give you the best deal.

Be aware that some lenders will only lower the origination fee in exchange for a higher interest rate on your loan. You’ll have to decide if it’s worth paying less now to pay more later, but know that for a mortgage, you’ll be making payments for a long time. You might be better off paying more upfront if you can afford it than end up with even more interest piling on.3

Are Origination Fees tax deductible?

Most mortgage origination fees can be deducted from your taxes as long as they meet certain criteria. In the case of a mortgage, the home used as collateral to secure the loan must be the main home you live in, that loan must be spent on the home, the fee must be determined as a percentage of the total loan, and the percentage must be similar to other origination fee percentages in your area. For non-mortgage loans, it will likely depend on exactly what kind of loan you’re getting. You’ll need to look up the rules for your specific situation. You should also note that there may be additional loan fees beyond the origination fee that you will not be able to deduct.4

How do student loan Origination Fees work?

Aside from mortgages, another common origination fee is the student loan origination fee. These fees are usually deducted from the amount of the loan as it’s given to you, though you’ll still have to pay back the full loan amount. In a sense, it means you’ll be paying the loan origination fee twice. Regular federal student loan origination fees are usually around one percent of the total loan amount, similar to most mortgages. Federal PLUS student loans used for graduate school or the parents of dependent students have more expensive origination fees, often over four percent of the loan amount. All federal loans have origination fees, while some private student loans do not. Still, private student loans tend to have higher interest rates and other associated fees, so you’re likely still better off with a federal loan if you can get one. Be sure to compare loans using their annual percentage rate (APR), a number that adds up all fees and interest, so you can figure out which loan is most affordable for you.5

Bottom Line

It’s vital that you find out whether you’ll be expected to pay an origination fee and how much you’ll be expected to pay before you sign on to any loan. The higher the loan amount, the greater the origination fee will be, so you should negotiate it down, if you’re able to.

References:

1 McDonald, Michael. “What is a Loan Origination Fee?” Banking Rates accessed on March 20, 2017 at https://www.gobankingrates.com/mortgage-rates/loan-origination-fee/

2 “Loan Origination Fee” The Truth About Mortgage accessed on March 20, 2017 at http://www.thetruthaboutmortgage.com/mortgage-dictionary/loan-origination/

3 Ponder, Crissinda. “You Can Negotiate Your Mortgage Closing Costs. Here’s How” Bankrate accessed on March 20, 2017 at http://www.bankrate.com/finance/mortgages/negotiate-your-mortgage-closing-costs.aspx

4 “Publication 530- Main Content” IRS accessed on March 20, 2017 at https://www.irs.gov/publications/p530/ar02.html

5 Lane, Ryan “Changes Coming to Federal Student Loan Fees, Grant Amounts” US News accessed on March 20, 2017 at https://www.usnews.com/education/blogs/student-loan-ranger/articles/2016-06-08/student-loan-origination-fees-changing-soon