What is a mortgage origination fee? And do you have to pay it?

A mortgage origination fee is one of many charges a mortgage lender can impose on you for the privilege of borrowing from them. 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 opening the loan, processing and underwriting. This fee is one of the ways lenders make money.

Your lender generally breaks down the expenses that go into the origination fee on your loan estimate under the “Origination Charges” section.

How much is a loan origination fee?

The origination fee on a mortgage is typically 0.5 percent to 1 percent of the amount you’re borrowing. The average origination fee for a mortgage for a single-family home is about $1,852, according to the latest data gathered by the Consumer Financial Protection Bureau.

Along with the fee itself, your loan estimate might also list mortgage origination fee add-on charges. You’ll find all these expenses 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, broken down as:

• Courier fee: $25
• Document preparation fee: $200
• Processing fees: $395
• Tax service processing fee: $86
• Underwriting fees: $435

If you agreed to pay points (which you can choose to do in exchange for a lower 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 origination fee?

You’ll typically pay the mortgage origination fee, along with your down payment and other closing costs, when you close your loan — and your home purchase.

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 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 these costs and your down payment and all the other expenses (moving, etc.) that come with a new home. These loans are often marketed as “no-closing-cost mortgages” — a name that’s somewhat misleading. It’s not that you have no closing costs; it’s just that you don’t pay them on closing day, but over the life of your loan.

How to pay loan origination fees

When it comes time to pay your loan origination fees, you have a few different options.

• Direct payment at closing:  The day your mortgage and home purchases closes, simply write a check or arrange for an electronic payment/wire transfer  to cover the fees.
• Mortgage payment: You can also roll the loan origination fees into your mortgage — they are simply added to the principal amount of your loan. You begin paying them when your monthly payments start. It is a great option if you do not want an upfront expense, but prefer to pay over time.
• Seller’s concession: You can negotiate for the home’s seller to cover some or all of your closing costs, including the origination fees. Since it’ll come out of the sale proceeds, sellers sometimes prefer to make this sort of concession, rather than pay for big repairs or drop the asking price — or if they’re just eager to do the deal.
• Assistance programs: Many homebuyer assistance programs — generally run by federal, state or local authorities — offer help for the cash portion of your home purchase, like closing costs, including your mortgage origination fee. Depending on your income and the program, the assistance may be an outright grant, or it could be a low-cost or forgivable loan.
• Manufacturer incentives: If you’re buying new construction, the builder and developer may offer incentives to close the deal or get you to finance through them. These enticements can include credits towards your origination fees.
• Lender credits: Similarly, your lender may offer lender credits that can be applied to your mortgage’s origination fees (and other closing costs). However, the interest rates on these mortgages often run higher than on other types of mortgages; the more you get in credits, the more interest you pay.
• Lender discounts: Sometimes, you can negotiate with your lender to lower or even remove loan origination fees. Not all lenders will oblige, so it’s something to consider and ask about when shopping around for loans.

With some of these options, it’s important to 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.

Origination fee FAQs

• Do all lenders charge an origination fee?

  No, not all lenders charge origination fees. Some credit unions and online lenders don’t. But among traditional lenders, it’s something of a tradition. Origination fees often go by a variety of names, and are imposed entirely at the lender’s discretion.
  

• Why do mortgage origination fees exist?

  When you apply for a mortgage, the lender doesn’t just take a quick look at the paperwork and approve or deny your loan. Processing a mortgage takes a lot of time and effort. On top of looking at all of the documents you provide, the lender needs to draw up paperwork and spend time digging into your credit history. Of course, all this time and effort comes at a cost. Lenders pass this cost on to borrowers through origination fees.
  

• Can you negotiate the origination fee?

  Any fee in the origination charges section of your loan estimate is negotiable. It’s especially important to talk 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. And if you don’t ask, you’ll never get.
  

• How to finance a loan origination fee

  You could ask family and friends to cover the fee for you, making it part of a gift. You can also try negotiating a seller concession, in which the seller pays the fee for you. Many homebuyer down payment assistance programs also include help with origination fees and other closing costs — especially if those geared towards first-time homebuyers — as their aim is to reduce out-of-pocket expenses.
  

Additional reporting by Lena Borrelli