What is a mortgage origination fee and do I have to pay it?

Buying a home can be exciting and overwhelming, especially when it comes to financing your big purchase. While you probably know that choosing the right loan is important, you might not know about the loan origination fee that comes with taking out a mortgage.

Mortgage origination fees, which are a set percentage of the loan amount, can give you sticker shock if you’re not prepared. Many lenders charge an origination fee, but you might be able to lower it, or in some cases avoid paying it altogether.

• What is a mortgage origination fee?
• How do mortgage origination fees work?
• Do you have to pay a mortgage origination fee?
• How to save on mortgage origination fees

What is a mortgage origination fee?

The mortgage origination fee is a one-time fee that lenders charge to help cover the cost of processing and holding the loan. It’ll typically cost you between 0.5% and 1% of the total loan amount.

Mortgage origination fees are separate from your down payment or any earnest money deposit you make. You might see this fee listed as a loan origination fee or bundled with the processing fee, application fee, underwriting fee, and points in your loan closing disclosure.

Do all lenders charge a mortgage origination fee?

Not all mortgage lenders charge loan origination fees. But pay attention to the fine print: Lenders that don’t charge loan origination fees may charge higher interest rates to compensate.

How do mortgage origination fees work?

Lenders need to make money on loans. One way they do this is by charging a loan origination fee, which is often presented as a percentage or a flat fee. Many lenders offer various options for paying this fee. You may be able to wrap the fee into the mortgage loan, or you could pay the fee in cash.

For example, if you take out a $250,000 mortgage loan with an origination fee of 1% ($2,500), you could pay the fee upfront or ask the mortgage lender to wrap the cost into the mortgage loan. The latter would increase your loan amount to $252,500.

Do you have to pay a mortgage origination fee?

Some mortgage lenders may be willing to negotiate loan origination fees, but it almost always comes at a price. Lenders may agree to this in order to attract new customers or to help push a hesitant borrower to accept their loan offer.

If you do find a lender willing to offer a loan with no loan origination fees, expect to pay higher interest rates. If your lender offers a no-origination fee option, make sure to do the math to ensure the cost is acceptable.

If you don’t want to pay a loan origination fee, you have a few options:

• Ask the seller to cover the cost of the fee as part of the seller concessions.
• Ask the lender to negotiate a lower loan origination fee.
• Ask the lender to waive the loan origination fee.
• Choose a lender who doesn’t have a loan origination fee.

Can you negotiate a mortgage origination fee?

It may be possible to negotiate your loan origination fee, but you’ll need to consider the costs.

Negotiating a loan origination fee could save you money upfront, but you’ll likely pay more over the life of your loan if your lender charges a higher interest rate in return. It might make sense to negotiate a lower loan origination fee if you plan to refinance your loan in a few years or you anticipate selling your home before the 30-year mark.

Looking at the same $250,000 loan mentioned above, let’s assume it has an interest rate of 3% for the next 30 years. You could expect to pay around $1,054 per month and a total of $129,444 in interest.

If you negotiated no loan origination fee in favor of a 0.5% interest rate hike, you’d end up paying $1,123 per month and $154,140 in interest. That seemingly small 0.5% interest rate difference adds up to $24,696 more in interest over the life of the mortgage. In this case, paying the loan origination fee and getting the loan with the lower interest rate would be a better option.

Alternatively, you could add the cost of your loan origination fee to your loan. So, instead of a $250,000 loan, you’d have a $252,500 loan at 3% for 30 years. In this case, your monthly payment would be $1,065 and you’d pay $130,738 in interest. You’d only pay an extra $11 per month and $1,294 in interest by rolling the origination fee into your mortgage loan.

How to save on mortgage origination fees

Loan origination fees are often just part of the lending process. Companies want to make a profit on their loans, and origination fees help facilitate that profit. But you may be able to save at least some money on fees with one of these strategies:

• Pay in cash, upfront. The best way to minimize the cost of your loan origination fee is to pay in cash. When you pay the fee upfront, you don’t have to worry about accumulating interest on that amount.
• Shop around. Check rates from multiple lenders to see what loan origination fees they charge. Even a difference of 0.5% could save you hundreds of dollars.
• Negotiate. Ask your lender for a lower origination fee or no origination fee at all. If you’re willing to pay a slightly higher interest rate, you may be able to get your lender to agree. You’ll be in a better position to reduce or eliminate origination fees if you have a great credit score or a large down payment.