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A mortgage origination fee is one of many fees a mortgage lender can charge for allowing you to borrow financing. Here’s what you need to know about how the origination fee on a mortgage works, how much it costs and whether you can negotiate it.
What is a mortgage origination fee?
A mortgage origination fee is a fee that lenders charge for originating, or creating and processing, your home loan. The origination fee can cover a number of services, including origination, processing and underwriting. This fee is one of the ways lenders make money.
Your lender might break down the expenses that go into the origination fee on your loan estimate, under the “Origination Charges” section. Here, you might also see points (which you can choose to pay in exchange for a lower rate).
How much is a mortgage origination fee?
The origination fee on a mortgage is typically 0.5 percent to 1 percent of the amount you’re borrowing. As of 2019, the average origination fee for a mortgage for a single-family home was $1,852, according to data gathered by the Consumer Financial Protection Bureau.
You’ll find all origination charges on your loan estimate in the top section (“Origination Charges”) of the second page. For example, you might see total origination charges at $1,141, then see the following breakdown:
- Courier fee: $25
- Document preparation fee: $200
- Processing fees: $395
- Tax service processing fee: $86
- Underwriting fees: $435
If you agreed to pay points to reduce your interest rate, you’ll also see the cost for these points in this section. For each point you buy, you’ll typically pay 1 percent of the amount you’re borrowing, for which the lender will reduce your interest rate by 0.25 percent.
When do you pay the mortgage origination fee?
You’ll typically pay the mortgage origination fee, along with your down payment and other closing costs, when you close your loan.
Your lender will tell you how much money you’ll need to provide in the form of a cashier’s check, wire transfer or other secure payment method, and you’ll see a total breakdown of all fees and other charges on your closing disclosure, which you’ll receive at least three days prior to the closing.
Many lenders allow borrowers to roll the closing costs, including the origination fee, into their loan. This might be an appealing option if you don’t have enough cash on hand to pay the down payment and closing costs, and if you only plan to live in the home for a few years. That’s because the no-closing-cost option comes with higher monthly payments and interest charges over the life of your loan, since you’re now financing those fees.
Do you have to pay the origination fee?
There are a couple of situations where you can avoid paying the origination fee and even some other closing costs.
For example, while negotiating with a seller, you might be able to request certain concessions, one of which being the seller pays a portion or all of your closing costs.
You can also request lender credits, which is when the lender agrees to absorb some or all of your closing costs in exchange for a slightly higher interest rate.
In either situation, it’s important to consider all of your options and weigh the potential drawbacks against the benefits. With lender credits, for instance, think about how long you’ll stay in the home and how much the higher rate will cost you compared to how much you’re saving upfront.
Can you negotiate the origination fee?
Any fee in the origination charges section of your loan estimate is negotiable. It’s especially important to negotiate with the lender as you compare loan offers, when you have the same or similar quotes from multiple lenders. You can use other offers to convince your preferred lender to reduce its origination charges. There’s no guarantee that the lender will budge, but the more offers you have, the more leverage you’ll have.
What about no-fee lenders?
Some mortgage lenders offer no-cost mortgage loans where the lender absorbs some of the closing costs associated with originating the loan. In exchange, the lender typically charges a higher interest rate, so you’ll eventually pay those costs (and possibly then some). In some cases, the lender might add a prepayment penalty on these types of loans. That way, the lender doesn’t miss out on that profit, even if you don’t stay long enough to pay for it through the higher rate.
Some online mortgage lenders might not charge any lender fees, including origination fees, because they rely heavily on automated processes during underwriting and have no branch locations to maintain. In other words, they can afford to cut out fees because their costs are lower than a brick-and-mortar operation. In many cases, these lenders charge lower rates than competitors, giving them an advantage from a cost perspective.
Other fees associated with a mortgage
There are many other fees you’ll likely pay during the mortgage process and at closing. Some of the more common fees include:
- Appraisal fee
- Credit report fee
- Recording fee
- Prepaids (interest, homeowners insurance, mortgage insurance, property taxes)
- HOA dues
- Title insurance
- Title settlement and other fees
- Attorney fee
You might also see certain “junk” fees, or fees that are either unnecessarily high or unnecessary entirely. Take a look at your application fee, underwriting fee, rate-lock fee, processing fee and broker rebate to determine if they’re comparable to the fees you see with other lenders. If you believe they’re too high, contact your lender to find out if you can reduce or eliminate them.
How to find the best mortgage lender
There’s no single mortgage lender that’s best for everyone — each has its own set of loan options, eligibility criteria, fees and other features. The most important way to make sure you get the best deal on your mortgage is to shop around and compare multiple lenders.
A mortgage broker can help you with this process, but keep in mind that they typically only work with a set number of lenders, so you might still want to submit a few applications on your own.
As you compare various offers, look at the interest rates (including the APR), fees and other aspects of each loan to determine which one is right for you.