Origination Fees: Costs, Impact & How to Avoid Them

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Origination fees are charged by lenders when processing or potentially finalizing loan applications. 

They typically cover the costs of processing your application, verifying its information and generating the loan. They’re often paid when the loan closes, and are commonly included on mortgages, personal loans, some types of business loans, and auto loans.

How Origination Fees Work

Each lender may have their own processes to calculate and charge origination fees. Many charge a fee based on the total cost of the loan, though some may charge flat fees for all borrowers. 

In many cases, you’ll pay the fee as part of the loan’s closing costs. Some lenders allow you to include closing costs into the total value of the loan so you don’t have to pay them out of pocket, though this increases the overall amount borrowed. 

How Much Are Origination Fees?

The exact amount of the fees can depend on the type of loan. Many lenders, for example, charge origination fees on mortgages. It’s standard to charge between 0.5%-1% of the loan’s value. Borrowers typically pay these origination fees as part of their closing costs. 

If the value of the loan is $300,000, for example, may have a $1,500-3,000 origination fee. 

Origination fees for auto loans are typically between 1-2% of the total value of the loan. If you’re buying a car with a $25,000 loan, for example, you may have a $250-500 fee. 

Personal loans typically have origination fees ranging from 1-6%, though it’s not uncommon to see flat-fees or fees as high as 8% of the total cost of the loan. 

Factors that may impact your origination fees include: 

• The length of the loan, with long-term loans potentially having lower origination fees. 
• Your credit score, as borrowers with high credit scores may qualify for lower origination fees. 
• The type of loan, and the type of lender you work with. 

Are Origination Fees Negotiable?

Origination fees can be negotiable, so it’s always worth discussing with your lender. 

To negotiate, you can:

• Simply ask your lender if they can reduce or waive the fee. 
• Get loan estimates from multiple lenders and use competing offers as leverage.
• Show that you’re a low-risk borrower with a strong credit or financial history.
• Consider timing your loan when lenders might be more motivated to close deals, such as towards the end of a month or quarter. 

Some lenders might be more willing to negotiate than others.

It’s important to keep in mind that if a lender reduces the origination fee, they might try to make up for it somewhere else – like with a slightly higher interest rate. Always look at the total cost of the loan, not just the origination fee, and ask how waiving the origination fee would impact the overall value of the loan.

You can and should compare lenders’ loan estimates to assess the loan’s overall closing costs, including origination fees. Some lenders, especially credit unions and select online lenders, may even offer loans without origination fees from the get-go.

Origination Fees vs. Other Loan Costs

Origination fees typically won’t be the only costs associated with taking out a loan. 

While the exact fees depend on the type of the loan, it’s important to be aware of what you may be paying. 

Mortgages, for example, have closing costs, which typically make up between 2-6% of the loan. These costs may include expenses for origination fees, title insurance, home inspections, and more. These are rarely negotiable, though you can reduce costs on some expenses by shopping around between select vendors. 

Many loans also have administrative fees, which cover the lender’s internal processing costs. These may be a flat fee or percentage, and are sometimes negotiable. 

Here’s a quick breakdown: 

Comparison Table: Origination Fees vs. Other Loan Costs

Pros and Cons of Loans with Origination Fees

There are both pros and cons to consider when assessing loans with origination fees — and we’ll help you break them down. 

Pros

There are two main advantages to consider with origination fees: They can help lenders cover processing costs, and they may help you get lower interest rates as a result. 

You receive lower interest rates with lenders charging origination fees compared to no-fee loans. Since interest rates can have a significant impact on monthly payments and total interest paid over the lifetime of the loan, this is often a worthwhile trade-off.

Let’s say you’re taking out a loan for $400,000, with a 1% origination fee of $2,000 at an interest rate of 5.85%. You’ll have a monthly principal and interest payment of $1,888 and pay $359,612 in interest over the lifetime of the loan.

Compare this to the same loan with no origination fees, but a 5.95% interest rate. With this arrangement, you’ll pay $1,908 per month in principal and interest, and pay a total of $366,983 over the loan’s lifetime. 

Cons

The downside of origination fees is that they’re an added cost that you need to pay at the beginning of the loan.

In some cases, you can lump your origination fees or other closing costs into the overall balance borrowed. Doing so will increase your upfront borrowing costs, however, and you’ll be paying interest on them.

High origination fees can also make refinancing or early payoff less beneficial. Your break-even timeline will often be extended, especially with an increased loan balance. 

How to Avoid or Minimize Origination Fees

To avoid or minimize origination fees, you can try the following strategies:

• Choose lenders that don’t charge origination fees, or who are known for low origination fees.
• Improve your credit score with tactics like making on-time payments and keeping debt utilization low, which can help you qualify for better loan terms.
• Get multiple quotes from different lenders and consider alternative loan options.
• Discuss the removal of origination fees and negotiate with your lender of choice. 

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