Home Loan Origination Fee: The Inside Scoop

September 11, 2023 - 6 min read

The home loan origination fee forms part of your closing costs, which include all the fees and charges that pop up as you reach the final stage of your purchase journey—known as “closing.” It’s the day you officially become the proud owner of your new home.

Closing costs can add up. But don’t worry. You’ll see them listed on your loan estimate, which is the lender’s formal quote for your mortgage. So, you’ll know what’s coming.

Keep in mind that lenders can’t just charge things up on their loan estimates without good cause. Before closing day, you’ll receive a closing disclosure, which breaks down the final tally, including the home loan origination fee.

Read on to learn all about loan origination fees, including how to negotiate them and find the best deal possible.

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What are mortgage loan origination fees?

They are the fees that cover your lender’s behind-the-scenes expenses and keeps their ship sailing smoothly. Without them, lenders would be in quite a pickle—imagine them trying to manage without funds for staff, rent, and all the other essentials.

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“Why don’t lenders just rely on the interest we pay on our mortgage?” you might wonder. Well, because few of them actually see that money.

Most lenders mainly exist to get your loan set up or (“originated”). Soon after your loan closes, its documentation is added to a group of similar loans to form a type of bond called a mortgage-backed security (MBS). And that’s sold on to foreign and domestic investors as soon as possible.

The funds from these sales go back to the lender, allowing them to lend money to the next round of homebuyers.

How much are origination fees?

Loan origination fees often range between 0.5% and 1% of the total mortgage amount. How much you pay will be determined largely by your choice of lender and the risk you pose as a borrower.

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So, someone with a big down payment, a stellar credit score and easily manageable existing debts will likely pay a smaller loan origination fee. However, someone who is more in the “average” realm (like most of us) will typically pay a higher fee.

That’s because those with weaker financial profiles are statistically more likely to default on their loans than those with superior credit. As with virtually all lending decisions, it’s all about the math.

Some lenders balance closing costs and mortgage rates differently from others. So, you’re all about holding onto cash, you may be able to trade a higher mortgage rate for a lower origination fee.

Or, if your needs are different, you might be able to get a lower rate with slightly higher upfront costs. If that’s the case, check out discount points.

When do you have to pay origination fees?

Your loan origination fee falls due on closing day. And you’ll find a breakdown of all your closing costs, including that fee, on your loan estimate.

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Some lenders charge nonrefundable application fees to cover their initial costs when approving your loan. And that typically covers items such as checking your employment status and credit status. These fees usually hover around $500 or less.

Your lender must tell you about application fees in advance of you applying. And, if you have to pay one upfront, it is normally deducted from the origination fee at closing.

Are loan origination fees negotiable?

You bet. Loan origination fees are certainly up for negotiation, as we mentioned in the opening section.

However, there’s no guarantee that you’ll be able to reduce your fee. That will depend on a couple of things.

First, your lender will consider how keen it is to lend to you. So, the lower the risk of you defaulting, the better your chance of getting a lower fee.

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And, secondly, the lender will look to its own business. When it’s flooded with mortgage applications, it may be less inclined to do deals with individuals. But it has a few applications in its production pipeline and needs more customers, it might be more flexible to keep you happy.

It’s always important to get quotes from multiple lenders — as many as you have time to apply to. While many might not make the cut, create a short list of the promising ones. And then call each to see how it can sweeten the pot.

By all means, tell lender x that lender y has offered you a particular deal and ask it to beat it. There’s nothing wrong with leveraging different lenders against each other when negotiating. It’s the free market.

Do all lenders charge loan origination fees?

It’s quite common for lenders not to charge origination fees when you’re refinancing a mortgage. However, when it comes to new purchase loans, you’re more likely to encounter these fees.

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Of course, paying an origination fee can make sense if it buys you a lower mortgage rate. A slightly higher rate could end up costing you more over the life of the mortgage, so weigh your options carefully.

However, home buyers’ priorities can vary at different points in their lives. If holding onto cash is greater than your concern about long-term borrowing costs, that’s okay, too.

Hidden costs of the no origination fee mortgage

It’s been a long time since we spotted a mainstream lender offering a new mortgage without an origination fee. But, if the mortgage industry goes through a shift, it’s possible to start seeing fee-free offers.

If that’s the case, don’t assume that the lack of a fee makes an offer a good one. Always turn to your loan estimate to see what you’re really paying.

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Page 1 of the loan estimate will show your monthly payment. Multiply that by 360 to know how much you will pay over the life of a 30-year mortgage. Or by the appropriate smaller number if you think you’ll move sooner. Do the same with all your quotes so you can compare them.

Then, turn to page 3 of the loan estimate. It will show your annual percentage rate (APR), which tells the “real” interest rate: your mortgage rate plus the upfront loan costs spread over the lifetime of the mortgage.

On the same page, you’ll find the sum you’ll pay over the first five years of your loan.

All these figures will give you the information to make meaningful mortgage comparisons. What you do with that information is up to you and will depend on your current financial goals.

The bottom line

At worst, consider the origination fee a necessary cog in the machine. Sometimes, it can even be your ticket to a lower mortgage rate.

Whether it’s lowering overall borrowing costs through a low rate or opting for lower upfront expenses with a higher rate, it’s up to you. Just be sure to inform yourself about the choice you’re making by carefully comparing quotes.

In an ideal world, you’d choose the lowest possible mortgage rate. But sometimes, you may have to swallow a higher rate to get your loan. The key is to get lots of quotes from different lenders. That will give you the best chance of landing the best overall deal.

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Why am I being charged a loan origination fee?

Lenders rely on this fee as a significant source of income. Without it, the company — and all its competitors — would likely go out of business and you wouldn’t be able to get a mortgage.

What is a typical loan origination fee?

Most people pay between 0.5% and 1% of their loan’s value as an origination fee. But it can be higher or lower. On August 18, 2023, the average American mortgage size was $407,700. On a loan of that size, the average origination fee would have been between $2,039 (0.5%) and $4,077 (1%).

Is an origination fee the same as points?

No. Discount points are a straightforward way to buy a lower mortgage rate by paying extra on closing. An origination fee might also yield a lower rate, but the connection isn’t as straightforward.

Can you negotiate a mortgage origination fee?

Absolutely. You can negotiate most figures on your quote — even the mortgage rate. But how susceptible a lender will be to negotiation will depend on how keen it is to secure you as a customer.

Peter Warden
Authored By: Peter Warden
The Mortgage Reports Editor
Peter Warden has been writing for a decade about mortgages, personal finance, credit cards, and insurance. His work has appeared across a wide range of media. He lives in a small town with his partner of 25 years.
Aleksandra Kadzielawski
Reviewed By: Aleksandra Kadzielawski
The Mortgage Reports Editor
Aleksandra is the Senior Editor at The Mortgage Reports, where she brings 10 years of experience in mortgage and real estate to help consumers discover the right path to homeownership. Aleksandra received a bachelor’s degree from DePaul University. She is also a licensed real estate agent and a member of the National Association of Realtors (NAR).