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The homebuying process is a stressful, exciting time – one that, unfortunately, is also rife with all manner of fees.
While many of these – like home appraisal and inspection fees – come from third parties, lenders charge a few of their own, too.
One of the most common you’re likely to run into is the mortgage origination fee.
What is a Mortgage Origination Fee?
Lenders charge origination fees to cover the costs of underwriting a mortgage. Part of the proceeds goes toward overhead expenses, such as payroll, scheduling, and attorney’s fees. The rest constitutes the lender’s profit.
You may find lenders who boast about eliminating origination fees entirely. However, they typically recover their lost potential in other ways – notably by charging higher minimum interest rates.
The higher the rate, the more they can fetch when they sell your loan to a mortgage investor after closing.
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How Does a Mortgage Origination Fee Work?
Mortgage origination fees take a few forms – though essentially, they’re any fees that add to a lender’s profit margin when closing a loan.
While some lenders are upfront about their origination costs, others may disguise them with clever names like:
- Application fees
- Administration fees
- Processing fees
- Underwriting fees
Discount points – optional costs you incur upfront to lower your mortgage’s interest rate – also count as origination fees.
Regardless of the specific name, you can find these fees disclosed on your Loan Estimate, Page 2, Section A, under the section titled “Origination Charges.”
How Much Do Mortgage Loan Origination Fees Cost?
Unless you opt for tons of discount points, your origination fee will cost between 0.5-1.5% of your total loan amount.
For example, if you take out a $250,000 mortgage, your origination fees could cost anywhere between $1,250 and $3,750.
Do You Have to Pay Origination Fees?
Yes – and, technically, no.
Mortgage Lendersare in the business to make money, which means they’re going to boost profits where they can.
Those lenders that don’t charge origination fees often charge higher interest rates instead, negating their need for additional fees. You can also take out a lender credit, which builds some or all of your closing costs into your loan.
Either way, the lender will get their money, even if you don’t pay “origination fees” by name.
When Do You Have to Pay the Mortgage Origination Fee?
Typically, you pay origination fees as part of your closing costs (unless you build them into your loan).
But if you’re able to negotiate your way out of these extra charges, you may not pay anything at all.
How to Avoid Paying a Mortgage Origination Fee
A mortgage with no “origination fees” is often riddled with miscellaneous costs or higher interest rates.
Typically, you can’t get out of paying the origination fee – or some form of profitable charge – entirely.
That said, there are ways to lower your burden (or put it on somebody else’s shoulders).
Identify Unnecessary Fees
One way to lower your costs is by educating yourself on add-ons that lenders use to pump up their profits.
You can find these fees in the Loan Estimate under “Origination Charges,” even if they’re not called that.
Aside from optional discount points, you may find several “junk fees” under various names, such as the:
- Administration fee
- Underwriting fee
- Processing fee
- Document preparation fee
- Appraisal review fee
By splitting up these fees, the lender hopes to make the cost of taking out a mortgage seem less intimidating to buyers.
Many assume that if they charge various smaller fees, you’ll be more amenable to paying those than one beefy fee.
But that doesn’t mean that these fees are reasonable – or that you don’t have the power to negotiate their size or existence.
Once you know what kind of fees to look for, you can compare lenders on even footing.
When shopping for a mortgage, it’s usually wise to submit applications to at least 3-5 lenders so you can find the lower interest rates and fees.
Once you have all your potential lenders’ Loan Estimates in hand, you can start comparing their fees.
When you do, be sure to compare the total cost of origination fees. Remember, some lenders will break up their fees to make them more palatable (and less optional).
But any fee listed under “Origination Charges” should be lumped together as part of the total “origination fee.”
Additionally, you’ll want to compare fees on the same types of loans. For instance, fees on a 10-year adjustable-rate mortgage (ARM) will likely vary from those on a 30-year fixed.
Another way to compare your lenders’ fees is to examine the difference between their base interest rates and APR (annual percentage rate).
In short, the APR includes the base interest rate plus the lender’s closing costs. The larger the difference between the base rate and the APR, the more the lender charges in total closing costs.
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Any fee under “Origination Charges” is negotiable by the borrower (you). These loans serve to boost the lender’s profits – while making money on loans is neither immoral nor illegal, you shouldn’t have to pay out the nose to buy a house, either.
As such, it’s often to your benefit to negotiate for a lender to lower or remove their origination fees.
If you do, bear in mind these key points:
- The larger your loan and the better your credit, the more leverage you have at every stage in the negotiation process.
- You should start negotiations before receiving a Loan Estimate. Ask a mortgage representative for a breakdown of the origination charge you can expect to find under “Loan Costs, Item A” and get that in writing to compare against later.
- Once you have several lenders’ Loan Estimates in hand, you can negotiate by showing them what other lenders are willing to charge to get your business.
- If you’re paying closing costs upfront, ask your lender if they’d be willing to reduce their fees in exchange for receiving a fat wad of cash now rather than later.
>> More: How to Choose the Best Mortgage
Ask for a Seller’s Concession
If you’re buying a home that’s been on the market a while, is in disrepair, or that needs to move quickly, you can ask the owners for a seller’s concession. If they agree, they’ll cover part or all of your origination fees themselves.
However, because seller’s concessions must be included in your purchase agreement, most major loan programs limit how much sellers can pay in closing costs. You’ll usually see the maximum listed as a percentage of the overall loan total.
Frequently Asked Questions About Origination Fees
Can You Negotiate the Mortgage Origination Fee?
Yes! All mortgage origination fees are negotiable. Some lenders don’t charge them at all.
Is the Mortgage Origination Fee Included in Closing Costs?
Yes again! Closing costs usually come out to 3-5% of the loan’s total value. Origination fees are included in that number and usually amount to 0.5-1.5% of the loan’s total value.
Can Mortgage Origination Fees be Waived?
You can always ask your lender to waive your origination fees without changing your interest rate. While you’ll have more leverage on bigger loans or with a better credit score, it never hurts to ask!
Bottom Line: Mortgage Origination Fees
Lenders charge origination fees to cover the cost of their services and boost their profits.
The specific amount you pay depends on your location, loan size, financial situation, and the lender you choose.
While most lenders who don’t charge fees bump up their interest rates, you may be able to negotiate lower (or no) fees without paying more in interest, too. It never hurts to ask!