A loan origination fee is one of the closing costs you have to pay when your home purchase or refinance is finalized.
Specifically, it’s the closing cost that covers your lender’s expenses in creating and setting up your mortgage. (“Origination” is just industry jargon for creating and setting up a loan.)
An origination fee should cover things like processing your application, “underwriting” (verifying your information), preparing documents, putting the money in place, and general administrative tasks.Click here for today's mortgage rates.
In this article, we’ll cover:
- How much is the loan origination fee?
- Why do origination fees exist?
- How to watch out for junk fees
- 7 tips to minimize origination fees
- How to use your loan estimate to balance rates and fees and choose the best deal
- Can my lender increase its origination fee after issuing its loan estimate?
- Other closing costs
You can typically expect to pay between 0.5% and 1.0% of the loan amount, though 2.0% isn’t unheard of. Some lenders don’t charge an origination fee at all. So amounts can vary widely.
Mortgage lenders have one main source of revenue (borrowers) and two main types of income.
First, most mortgages are sold to investors as soon as possible after they’re originated. Investors pay a sizeable sum for the right to collect interest on your loan for years to come.
Secondly, the lender can cover its overhead and expenses and make a profit through the fees it charges you for mortgage closing costs.
It doesn’t matter much to mortgage companies where their revenue comes from as long as it comes. Some lenders charge high rates and low fees while others do it the other way round. Especially when you’re refinancing, you may well be offered a “no-cost” deal. But you can be pretty sure you’ll pay for it one way or another, either in higher rates or by having the costs added to the balance of your new home loan.
After all that you may be unsure about how to differentiate between a good and bad overall deal. We break it down below.Ready to buy a house? Start here.
Unsurprisingly, mortgage companies are often tempted to pad their quotes (“loan estimates”) with so-called junk fees. They think that giving you a long, itemized list of their expenses will be an easier sale than quoting you one, big origination fee.
Of course, not all itemized expenses are junk fees. For example, if you’ve chosen to buy discount points (pay a little more on closing for a slightly lower rate), those should be itemized separately.
And there are other costs that should be itemized: things like escrow and “per diem interest,” which is what you pay to cover the interest on the days between closing and making your first monthly payment.
But pretty much everything else is a junk fee. The Mortgage Professor came up with a list:
- Administrative fee
- Affiliate consulting fee
- Amortization fee
- Application fee
- Assumption fee
- Bank inspection fee
- Document preparation fee
- Document review fee
- Express mail fee
- Funding fee
- Lender’s attorney fee
- Lender’s inspection fee
- Messenger fee
- Notary fee
- Photograph fee
- Processing fee
- Settlement fee
- Sign-up fee
- Translation fee
- Underwriting fee
There’s nothing inherently wrong with itemizing fees. But these are called junk fees for a reason. They’re stuff every lender has to do on pretty much every mortgage and refinance. And sometimes mortgage companies itemize them so their overall fees are higher than necessary. It’s a bit like getting to the checkout and the retailer adding all its expenses to the price shown on the shelf.
So don’t be blinded by junk fees. Keep your laser focus on finding the best overall deal.
And take care when you’re closing. Your lender can’t change your mortgage loan estimate without a very good reason. So make sure that its loan estimate and your closing statement match up precisely.
How to minimize your loan origination fee
Advantage of Paying Origination Fees Upfront
We’ve already mentioned the choice you can make between:
- Minimizing the closing costs you face by paying a higher interest rate
- Paying more upfront in exchange for a lower rate
But let’s dig a bit deeper.
If at all possible, it’s often a good idea to pay more upfront (including discount points) and make significant savings over the lifetime of your loan. When you’re borrowing this much over decades, even a slightly lower interest rate can leave you thousands better off over time.
But that mostly applies to those buying forever homes. Most homebuyers move every seven years or so. If that’s you, the money you invest in buying yourself a lower mortgage rate won’t have as much time to pay you back. Often, those planning to stay put for only 5-7 years find it better to live with a higher mortgage rate rather than pay more on closing.
Now’s the time to use a mortgage calculator to model your loan options so you can make an informed decision. The Mortgage Reports has a whole suite of them for refinances and different sorts of mortgages. See how much your upfront investment in closing costs will save you in lower monthly payments over the number of years you think you’re likely to remain in residence. So you can then decide whether the pain is worth the gain.
These tricks can help keep your closing costs down.
1. Shop around. The more loan estimates (mortgage quotes) you have, the better your chances of finding your best deal for your personal finances. And the wider your options for balancing your closing costs and mortgage rate.
2. Get lender credits. Some lenders will willingly trade you lower closing costs for a higher mortgage rate. Ask how flexible your shortlisted lenders are.
3. Negotiate. Lenders must by law send you a loan estimate within three working days of receiving your application. Once you have it, you’ll find the closing costs on page 2. Those in section A (Origination Charges) are negotiable. Get multiple loan estimates and you can play one lender off against another.
4. Get gifts. If you have family members who like to help, they may be happy to give you some money toward your loan. You need to be careful about how you receive this because there are often strict rules about gifts for down payments and it’s hard to differentiate between those and closing costs.
5. Use a down payment assistance program. There are more than 2,000 of these nationwide and many of them help with closing costs as well as down payments. Most lenders are cool with these.
6. Ask for seller concessions. Sometimes your seller may be willing to contribute to your closing costs in order to seal the deal. This happens most commonly in buyers’ markets.
7. Shop for closing costs you can control. Most closing costs are set by the lender and you can only lower them by negotiation. But some (from your title search to your pest inspection fee) are ones you’re entitled to shop around for yourself as long as you use a qualified supplier. See section C on page 2 of your loan estimates for ones you can call around and get quotes for.
Getting loan estimates from multiple lenders is the golden rule for those wanting a mortgage or refinance. Federal regulator the Consumer Financial Protection Bureau (CFPB) standardized the contents and layouts of these several years ago. So now it’s really simple to make side-by-side comparisons.
Here’s a screengrab showing page 2 of a sample loan estimate from the CFPB’s website. That’s the page that deals with closing costs.
That sample dates back to 2013 and was for one mortgage. So don’t expect any of the numbers to match with what you’ll receive; they’re just for illustrative purposes.
But you can see how powerful these documents are. If you compare competing quotes carefully, it’s very hard for a lender to rip you off. And you have a chance to negotiate hard: “Lender X is charging a much lower origination fee than you. Please will you see if you can better it?”
Page 3 is even more important
If page 2 is a powerful source of leverage, page 3 provides even more important information. Because it shows you your annual percentage rate (APR), which is the actual effective rate you’ll pay, allowing for closing and all other costs. That’s a more useful indicator than your bare interest rate.
Better yet, it shows what your situation will be in five years’ time: How much you’ll have paid in dollars for the mortgage By how much you’ll have reduced the amount you owe
So spend a lot of time comparing all your page 3s.
Again, that’s a screengrab from the CFPB’s sample and the same caveats apply.
“It is illegal for lenders to deliberately underestimate the costs on your Loan Estimate. However, lenders are allowed to change some costs under certain circumstances,” according to the CFPB.
In other words, nothing can change without good cause. So your interest rate might go up or down before you lock it. And your deal might alter if your credit score takes a tumble (there’s usually a final credit check in the days running up to closing) or if your appraisal comes in below or over what you expected.
And, of course, fees for “services you can shop for” might go up or down, depending on how well you negotiated with your chosen suppliers.
But, in principle, the lender is legally obliged to give you its best, most honest assessment of your likely total cost. That’s why these used to be called “good faith estimates.” And it can only change things if it has objectively good grounds for doing so.
As for its origination fees, those are among the most difficult for the lender to change. Indeed, unless there is a material change in the circumstances surrounding your loan, it cannot change them at all. Of course, there’s an exception if you manage to negotiate them down.
If those grounds arise, it should send you a revised loan estimate. And, the CFPB says, “If the costs have increased more than the allowed limits and your application has not had a ‘change in circumstances,’ you are entitled to a refund of the amount above the allowable limits.”
For the sake of completeness, you can expect some or all of the following, in addition to the loan origination fee:
- Origination fee or charges
- Junk fees. As listed above, but only some lenders use them.
- Discount points. If you choose to buy them.
- Appraisal fee
- Credit report fee
- Flood determination fee
- Flood monitoring fee
- Tax monitoring fee
- Tax status research fee
- Pest inspection fee*
- Survey fee*
- Title insurance binder charge*
- Lender’s title insurance policy*
- Title settlement agent’s fee*
- Title search fee*
*Ones you can shop around for
Additionally, you might choose to have your own title insurance policy. And your lender may insist you pay some homeowners insurance premiums, mortgage insurance premiums, and property taxes into an escrow account on closing.
Expect, too, to pay that “per diem interest” (“prepaid interest,” on your loan estimate), which we mentioned above. That covers the interest due between the day you close and your first monthly payment.
So how much will you actually need to close? Check the last item on page 2 of your loan estimate: “Estimated Cash to Close.”If those grounds arise, it should send you a revised estimate for your total loan costs. And, the CFPB says, “If the costs have increased more than the allowed limits and your application has not had a ‘change in circumstances,’ you are entitled to a refund of the amount above the allowable limits.”