Average loan origination fees by loan type
Interest rates are often the first thing people look at when applying for a loan. And while it’s important to know how much you’ll pay in interest, there’s another equally important factor that you shouldn’t ignore: loan origination fees.
Lenders charge origination fees—also known as processing, underwriting, or application fees—for processing loans and disbursing funds.
The majority of the fee goes to the loan officer as a commission for overseeing and closing the loan. This includes fees for pulling credit and verifying identity and documents.
Here’s what you should know about loan origination fees before applying for a loan.
How much should origination fees be?
Loan origination fees can be costly. The higher the loan amount and fee, the more money you’ll pay.
For example, with a $200,000 mortgage and loan origination fee of 1%, you’ll pay $2,000 in origination fees. Likewise, a personal loan for $25,000 with a 4% origination fee will cost you $1,000.
How do lenders collect loan origination fees?
Often, lenders charge loan origination fees after loan approval. However, in some instances, the lender will roll the origination fee into the loan’s balance.
For instance, if you borrowed $20,000 for a personal loan and the loan origination fee is 4%, your new loan amount will jump to $20,800.
Other lenders will deduct the amount you owe from your disbursed funds. So instead of paying the fee within the loan, you’ll receive less money. The $20,000 will instead become $19,200 minus the $800 origination fee.
You may also have to pay the $800 origination fee outright before the loan pays out.
If you intend to keep a loan for its full term, it makes sense to pay for your costs up front in point. Having those fees built into your loan will cost you more in the long run.”
Origination fee vs. points
You may have heard the term “points.” This refers to loan closing costs. Instead of paying origination fees, you may pay points. A point is 1% of the loan amount. So if you pay two points, you pay 2% of the loan amount in closing costs.
If, on the other hand, you only intend on keeping the loan for a short time, then you’ll want to avoid the upfront costs and take a higher interest rate. Doing this will save you money.”
Casey Fleming is the author of The Loan Guide: How to Get the Best Possible Mortgage. When deciding whether to pay points or origination fees, look at your circumstances, he says.
“If you intend to keep a loan for its full term, it makes sense to pay for your costs up front in points,” says Casey. “Having those fees built into your loan will cost you more in the long run.”
If, on the other hand, you only intend on keeping the loan for a short time, then you’ll want to avoid the upfront costs and take a higher interest rate. Doing this will save you money.
When you hear about a “no origination fee mortgage,” remember that lenders are in business to make money. This term generally refers to a mortgage where you pay points instead of origination fees.
How to lower loan origination fees
One way or another, you’ll have to pay fees to borrow money. But it’s possible to pay less in origination fees. Here are four ways to accomplish that.
1) Check with several lenders
Getting several quotes is an important part of finding the best rate. Even a difference of one percentage point in fees can save you a significant amount of money.
If you’re looking for a personal loan, SuperMoney has a personal loan engine that enables you to get preapproved rates and terms from multiple lenders at the same time. You can do the same for auto loans and business loans as well.
2) Pay upfront costs
Again if you intend to keep the loan for its full duration, then consider paying points up front. It may seem costly now, but it can save you from paying more interest in the long run. The more you pay upfront, the less you pay overall.
3) Negotiate with the lender
You can ask the lender to waive or lower the origination fee without hiking the interest rate. This tactic has the most promise if you have good credit, a steady job, and are borrowing a large amount of money.
4) Ask the seller
If you’re buying a home from motivated sellers, you might be able to get them to pay some or all of the closing costs for you. Not all purchase agreements allow for this, but it’s worth a try.
Origination fees aren’t the only charges you’ll pay when closing a loan. Check your Loan Estimate before signing to see what other closing costs you must pay.
Additional costs include expenses incurred from the services of third parties. These can include appraisers and companies that do credit checks, for example.
It may be possible to save money by finding third-party vendors that charge less for such services.
As with any major financial decision, it’s vital that you do proper research before applying for a loan. By doing so, you can avoid costly mistakes and be confident you’re making the best decision for yourself.
Julie Bawden-Davis is a widely published journalist specializing in personal finance and small business. She has written 10 books and more than 2,500 articles for a wide variety of national and international publications, including Parade.com, where she has a weekly column. In addition to contributing to SuperMoney, her work has appeared in publications such as American Express OPEN Forum, The Hartford and Forbes.