Loan Origination fee definition

Writer and editor - Bryan Robinson | Updated on 2023-01-11

What is an origination fee?

An origination fee is a fee charged by a lender for processing a loan application. This fee is generally a percentage of the total loan amount and is paid at closing. Origination fees are just one of many fees that can be charged by a lender, so it’s important to compare all fees before choosing a loan. While origination fees are common, they’re not always necessary. Some lenders may waive their origination fees if you agree to pay a higher interest rate on your loan. Others may absorb the cost of origination into your overall loan amount rather than charging you a separate fee.

How is the origination fee calculated?

So, when it comes to knowing what you must pay when getting a loan, you must know how the origination fee gets calculated. Here are some of the methods used:

As a percentage of the loan amount

The origination fee is is calculated as a percentage of the loan amount and is typically between 0.5% and 1% for personal loans. For example, if you take out a $10,000 loan with a 1% origination fee, you’d pay $100 at the time of closing.

As a flat fee

Some loans have an origination fee which is a flat fee. The actual fee amount depends on the type of loan being originated, with home mortgages tending to have the highest fees and personal loans the lowest. The origination fee is typically a percentage of the loan amount, with 1% being common for mortgage loans.

Related reading: overdraft fee page, Late payment fee page.

What are the disadvantages of paying an origination fee?

For borrowers, origination fees increase the cost of borrowing and can reduce the amount of funds available for other purposes. You also have to pay the fee even if your loan is not approved.

The fee is not tax-deductible

On of the most notable disadvangages is the fee is not tax-deductible. Additionally, if you roll the fee into your loan, you will be paying interest on it over the life of the loan. Finally, some lenders charge an origination fee even if your loan application is not approved, so be sure to ask about this before you apply.

What are the advantages of paying an origination fee?

There also may be a few advantages of paying an origination fee, such as:

Lower interest rate

Origination fees are common on mortgages and student loans, but you may also see them on personal loans and business loans. Some lenders advertise “no origination fee” loans, which can be a good deal if you comparison shop and find a low interest rate.
Paying an origination fee may lower your interest rate because it allows the lender to recoup some of their processing costs up front rather than adding them to your loan balance or charging a higher rate to make up for them. For example, if you were quoted two identical 30-year fixed-rate mortgage loans — one with an origination fee and one without — the loan with the Origination Fee might have a slightly lower interest rate than the no-fee loan.

Shorter loan term

Loans with an origination fee tend to have a shorter loan term than loans without an origination fee. Loans with origination fees are typically repaid within 5 years.
The shorter loan term means you will have to make larger monthly payments, but you will save on interest charges over the life of the loan.

Lower monthly payments

Paying an origination fee may reduce the monthly payment on a loan, but it will also increase the total cost of the loan over time. Borrowers should carefully consider whether paying an origination fee is worth the trade-off before agreeing to pay one.
Be sure to compare the total costs of each loan before deciding which one is right for you. In some cases, the difference inOrigination fees may not be worth it if it means paying a higher interest rate over the life of your loan.

Bryan Robinson

Bryan Robinson
Writer and editor


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