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How Do Origination Fees Impact My Loans?

May 23, 2023

An origination fee might be charged by mortgage brokers, auto loan lenders, and other loan lenders. They are typically a fee that comes at the beginning of a new loan.

Taking out a loan can be a bit of a process. There are documents to submit, applications to fill out, and fees to pay when getting a new loan. One common loan fee is called the origination fee. This can also sometimes be called an application fee, a processing fee, an underwriting fee, or an initial fee. 

What is an Origination Fee?

origination fee definition

An origination fee is usually a one-time fee that gets charged at the beginning of a new loan. It is often the first fee associated with your loan agreement and is used to pay the costs of processing and setting up your loan. This type of initial charge can come up for all kinds of loans including mortgages, government-backed loans, personal loans, payday loans, and title loans. Sometimes this loan will pop up as a part of the closing costs. 

There can also be other fees associated with an origination fee like appraisal fees or finders fees that help pay the salesperson, realtor, or agent that helped you get the loan or product you were looking for. Many times these are also origination charges that will be paid at closing once the agreement is official. 

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What is a mortgage origination fee?

Lenders have to make a profit on the loans they give out, otherwise, they wouldn’t be able to provide this borrowing service in the first place. Home mortgages are no different. By helping you buy your dream home, the mortgage lender will make a profit through fees like the mortgage origination fee and the interest

What is a personal loan origination fee?

When taking out a personal loan you might also have to pay an origination fee. Luckily though, there are many instances that can sometimes waive this charge. For instance, many direct lenders will easily waive this charge because they process the loan themselves and can afford to cut those kinds of costs. 

What is a refinance origination fee?

If you’ve ever refinanced a loan then you’ll know that many times this option comes with a cost. This cost is sometimes an origination fee or refinancing fee used to reprocess the new, readjusted loan agreement. 

Origination Fees Vs Points

Origination fees and origination points are similar to one another. An origination fee is the charge a borrower pays while origination points are all the fees involved in the loan’s processing and set up. There are also discount points to consider, which are payments that lower the interest on a loan, particularly a mortgage loan. 

An origination fee is a fee charged for processing a new loan. Loans can also come with discount points and origination points. 

discount points definition

A discount point represents the amount of loan interest paid at the beginning of a new loan. The more discount points you pay at the beginning the less interest accumulates on your loan overall. 

origination point definition

An origination point represents the amount the borrower pays in fees that have to do with the initiation of the new loan. This might include closing costs, processing fees, appraisal fees, inspections, and notary fees. 

How Much Are Loan Origination Fees?

Origination fees cover the cost of running your application, processing your loan, and ensuring that it complies with all applicable laws and regulations. The actual amount of these fees will vary based on the lender, the loan type, and your personal qualifications. 

The amount might also vary depending on whether you are using direct deposit payments or ACH payments or whether you have good credit or bad credit. Fees can also be calculated as a flat rate or a rate percentage based on the loan amount. 

Another factor that can determine whether you pay this charge or no is what kind of loan you’re taking out. For example, prime loans often have better interest rates but they also usually have longer repayment terms and can have more fees and closing costs. Meanwhile, subprime loans are usually for smaller amounts and shorter repayment terms so even though they have higher interest rates, they can often afford to forego charges like this.  

The exact fees depend entirely on the lender but can range between 1% to 5% of the total loan amount. For example, if you are obtaining a $150,000 mortgage loan, expect to pay an origination fee of $1,500.

In Conclusion, 

Just like other fees, the origination fee is there to help minimize the risks involved in the loan process. The borrower's ability to repay the loan is evaluated so that only credit-worthy borrowers are given the loan. The lender then receives the total amount of money that he has disbursed, plus his fee so they can continue to make a profit off of lending and stay in business.