Origination Fee

An origination fee is what lenders charge to create your loan—covering application processing, underwriting, document preparation, and funding. Think of it as the lender's administrative cost for doing business.

Typical Amounts:

• Mortgages: 0.5-1% of loan amount ($1,500-$3,000 on $300,000 loan)
• Personal Loans: 1-6% of loan amount
• Student Loans: Federal loans 1.057% (undergrad), 4.228% (grad PLUS)
• SBA Loans: 2-3.75% depending on loan size

What It Covers:

• Loan application review
• Credit check and verification
• Appraisal coordination (mortgages)
• Document preparation
• Underwriting analysis
• Loan funding/processing

How It's Paid:

Option 1: Pay Upfront: Pay cash at closing, reducing your loan balance.

• $300,000 mortgage + $3,000 fee = you pay $3,000 cash
• Loan amount stays $300,000

Option 2: Roll Into Loan: Add fee to loan balance (increases monthly payment).

• $300,000 mortgage + $3,000 fee = $303,000 loan
• You pay nothing upfront but pay interest on the fee for 30 years

Example Cost Difference: $3,000 origination fee at 6% over 30 years:

• Pay upfront: Save it
• Roll into loan: Costs $6,467 total (paying interest on the fee)

Origination Fee vs. Points:

• Origination Fee: Lender's processing charge (doesn't reduce rate)
• Discount Points: Optional payment to lower interest rate (1 point = 1% of loan, typically reduces rate 0.25%)

Negotiability: Origination fees are often negotiable:

• Shop multiple lenders (some charge 0.5%, others 1%)
• Ask lender to waive or reduce fee
• Consider "no closing cost" mortgages (higher rate instead)

Watch Out For: Some lenders advertise "low rates" but compensate with higher origination fees. Always compare APR (includes fees), not just interest rate.

Tax Deductibility: Mortgage origination fees are generally tax-deductible as mortgage interest in the year paid (if you itemize). Refinance fees must be deducted over the loan term.

Red Flags:

• Fees above 2% on mortgages (predatory)
• "Processing fees" in addition to origination (double-dipping)
• Fees that aren't disclosed upfront