An origination fee is a set of charges from a lender to process a new loan application.
What is an origination fee?
An origination fee is the set of charges you incur when you take out a loan. For a mortgage, your origination fee is due when you close on your home loan. This fee is also known as a “mortgage point” or an “origination point.” <?p>
This fee includes the customer service you receive during the loan process, such as assisting homebuyers in choosing an appropriate mortgage program as well as gathering and processing all loan files and applications. When the mortgage transaction is complete during closing, origination is concluded, and the fee is due.
Federal law dictates that all consumers receive a Loan Estimate within three days of their loan application. Page 2 of this form shows the breakdown of origination charges for your loan.
How much do origination fees cost?
The origination fee is usually 0.5% to 1% of the loan amount. For example, a lender may charge $1,000 on a $100,000 home loan. However, lenders will break down their charges differently.
Customers with high loan amounts are often able to negotiate a lower fee because of the value of the business. Similarly, a borrower with excellent credit and income is more attractive to a lender and therefore has more negotiating power. Be aware that a lower origination fee may result in a higher interest rate.
On the other hand, smaller loans sometimes have a higher percentage. The fee is greater because the same amount of work goes into processing the loan, but the lender receives less profit off the loan. They may attempt to compensate the lender by increasing the origination fee.
What does the origination fee include?
In general, the origination fee is broken up into three main charges. Lenders may vary the names and how they separate these costs.
First, lenders usually charge an underwriting fee. This charge is for verifying the information on the loan application before the loan approval.
Second, a processing fee covers the costs necessary for gathering documentation, employment and credit history, and other critical reports essential for the lender’s underwriting process.
Finally, an application fee is an up-front charge for processing your loan application.
Origination Fees Versus Discount Points
Origination Fees is what the lender charges to make the loan. These charges are mandatory. While the cost of discount points are also due at the time of closing and one point is also equal to 1% of the mortgage loan, discount points are different from the origination charges.
Discount points are prepaid interest. By purchasing a point, it can lower the interest rate on the loan by 0.25%. These discount points are optional. However, what may be confusing is that you can find your discount points in the category “Loan Costs” under Section A. “Origination Charges” on your Loan Estimate.