When you’re in the market for a mortgage loan, auto loan, personal loan or other type of loan, your biggest concern is likely the interest rate you’ll pay. But there’s another cost you should keep in mind when choosing a lender: the loan origination fee. A loan origination fee is what the lender charges to cover miscellaneous costs associated with making your loan. Keep reading to get the scoop on these common loan fees.
A loan origination fee is an upfront fee charged by a lender to cover miscellaneous costs of making a loan. These might include preparing loan documents, processing your loan application and underwriting the loan (that is, checking your credit to make sure you qualify for the loan).
Some lenders break out fees for preparation, processing and underwriting separately; others lump them all into the origination fee. Auto loans, mortgage loans, personal loans and student loans often have origination fees. Depending on the type of loan, origination fees may be due upfront as part of your loan closing costs, deducted from your loan proceeds or rolled into the total loan balance to be paid off over time.
Origination fees are set before you ever take the loan. If you apply for a mortgage, for example, the lender is required by law to give you a loan estimate that includes information about the cost of your loan, including origination fees and other closing costs.
Average Cost of Loan Origination Fees
Origination fees, generally quoted as a percentage of the total loan amount, vary widely.
While a lower origination fee may sound like a good deal, it’s not always your best option. Because origination fees help compensate lenders for making the loan, you might find that a loan with a lower origination fee makes up for it with a higher interest rate. Especially when taking out a large long-term loan such as a mortgage, a loan with a lower interest rate is usually a better bet, even if it has a higher origination fee. Even a small increase in your interest rate can add up to thousands over the life of a large loan.
How to Minimize Loans Origination Fees
Origination fees are set by lenders, and there’s no rule that dictates how much they should charge or even requires an origination fee in the first place. As a result, you may be able to get a lower fee than you’re originally quoted. Legitimate lenders disclose their loan origination fees upfront. If you’re not happy with the quoted origination fees, here are some ways you can try to lower them:
- Negotiate – If you have good to excellent credit, you may be in a position to negotiate a lower origination fee. Keep in mind, however, that this generally requires a tradeoff. To get a reduced origination fee, you may have to agree to a higher interest rate or a longer loan term—both of which typically increase the overall total cost of the loan.
- Shop around – Before applying for a loan, compare various lenders’ average origination fees. Lenders sometimes offer low or no origination fees to make their loans more appealing to borrowers. However, be sure to consider interest rates, loan terms and other fees—not just origination fees—to evaluate the overall cost of the loan.
- Ask for seller concessions – If you’re buying a home or a car, see if you can get the seller to pay your origination fees. This tactic works best in a buyer’s market in which home or car sellers are having problems finding buyers.
- Get lender credits – Mortgage closing costs can run into several thousands. Some mortgage lenders offer credits to cover these costs. The amount of the credits is rolled into your mortgage balance. You’ll pay higher interest rates in return for lender credits. However, depending on the size of your mortgage, it may be advantageous to put the money you would have spent on closing costs toward your down payment instead