Your interest rate is an important piece of any loan, but you can’t ignore loan origination charges. Those upfront fees draw on savings that you might prefer to spend on new furniture, moving costs, or upgrades to your home.
- Loan origination fees are what you pay to your lender for processing your loan application.
- There are several ways to spend less on these fees, such as shopping around, lender credits, or negotiating.
- Fees may range between 0.5% and 2%, and larger loans often come with smaller fees.
What Are Loan Origination Fees?
Origination charges are fees that you pay to your lender for processing your loan application. Depending on your lender, the costs might be bundled into one line item, or they might be itemized. If they're itemized, you may see the fees take on different names such as application fees, underwriting fees, and processing fees. Lender charges can also include “points,” which are optional payments that allow you to get a lower interest rate.
Terms like "processing fees" don't tell you much, about what you're actually paying for, but lenders charge these fees for all of the tasks required to close your loan. You can generally expect these fees to pay for things like:
- Gathering and organizing your documentation
- Analyzing your income, including any complicated income sources such as self-employment, rental units, and deductions
- Requesting information from employers, the IRS, and others
- Verifying the accuracy of documentation you provide
- Ensuring that your application meets criteria for government programs, or ensuring that it can be sold to investors
To see your fees, use the Consumer Financial Protection Bureau's Loan Estimate Explainer to review your loan estimate. The three-page summary shows essential details about your loan, like your monthly payment, closing costs, and a lot more.
If you don’t already have a loan estimate from every lender you’re considering, get one—nothing is official until a lender provides that document.
How to Minimize the Impact of Origination Charges
If you’re hesitant to pay thousands of dollars for origination charges, you have several options.
With any significant loan, it’s essential to get quotes from at least three different sources. Compare the interest rate and the total lender charges to find the best deal. Make sure you're including all the different forms that an origination charge can take—the specific names are less important than the total dollar amount.
The most straightforward approach is to pay upfront fees. This is also the most painful approach, at least initially, but there are upsides. You’ll know how exactly much you’re spending, and your loan is more likely to have lower rates when you pay fees upfront.
Advertisers may promote no-cost loans, but nobody works for free. The less you pay upfront, the higher your rate will be. Try to keep the big picture in mind and consider the total cost of a loan, rather than how much you'll spend on any single day.
Get Lender Credits
This is essentially the opposite strategy from that listed above. You can choose to take a higher interest rate, and by accepting a higher rate, your lender may make funds available (known as lender credits) to pay closing costs. It’s best to do this with a transparent lender that shows you several options—including those with and those without lender credits. With a higher rate, you’ll pay more interest over the life of your loan, so this strategy makes the most sense when you only plan on keeping the loan for a short period.
You can always simply ask your lender to waive origination fees without changing your interest rate. You might not succeed, but you never know unless you ask. You have the best chance of saving money if you have great credit, an uncomplicated income source, and a relatively large loan.
If you have generous relatives, ask your lender about paying loan origination fees with gifted funds. However, using gifts to help with mortgage down payments comes with extra complications. The lender may have rules about what kind of gifts can be used to help pay these fees. The money may need to come from an immediate family member who is willing to help you document the gift in writing.
If you’re buying property (as opposed to refinancing), the seller may be able to pay some closing costs for you—as long as the purchase agreement allows for this. Even in a seller’s market, this might be an option if you adjust your offer price to reflect the concession.
How Much Should You Pay?
Origination charges depend on multiple factors. You might expect to pay as little as 0.5% for processing charges, or somewhere around 2% on the higher end. However, the devil is always in the details, and you need to evaluate fees with other factors—like your interest rate—in mind.
Generally speaking, larger loans come with smaller fees. The work that goes into underwriting a small loan is similar to the work that goes into larger loans, but there's less of a payoff—smaller loans are generally paid off quicker and interest doesn't accrue as much. Therefore, borrowers may pay relatively high origination charges for small loans.
What About "Points"?
Some people confuse origination charges with discount points, but the two pay for different things. A discount point is an upfront payment that lowers your interest rate. Origination fees compensate your lender for closing your loan.
Adding to the confusion, the term “points” also gets used informally to refer to a percentage of the loan amount. In this sense, "two points" would be 2% of the total loan. This kind of "points" is used when talking about both processing fees and discount points.
Always ask for clarification if you’re not sure what a lender is referring to.
Other Closing Costs
Origination fees aren’t the only fees you pay when you take out a loan. You’ll pay additional closing costs, which are also listed on the second page of your loan estimate. Those expenses include services provided by third parties, even if your lender arranged those services.
For example, lenders need to check your credit, order an appraisal, and collect funding fees for government programs like FHA loans. For some closing costs, you can shop around and find a vendor that charges less for these services—potentially saving hundreds of dollars.
Altogether, your closing costs for a mortgage loan—with origination fees and other charges—might be between 3% and 6% of the total loan amount. If that's not something you've accounted for in your home savings plan so far, see if there is any room in your budget to pull together some extra funds to put toward all these home loan costs.