If you’re planning to use a mortgage to buy or refinance a home, there’s a good chance you’ll encounter the origination fee. And you’ll probably have a few questions about it, as many of our readers do: What is an origination fee? How much do they cost, on average? Do I have to pay it? You’ll find answers to these and other frequently asked questions below.
Note: The following information was updated in October 2013 and should remain current through 2014.
1. What are origination fees?
Let’s start with a basic definition. The verb originate is defined as “to bring into being, or to create.” That’s mortgage origination in a nutshell. It is when a mortgage lender or broker creates a home loan on behalf of a borrower. It is one of the first steps in the lending process.
They charge a fee for this service, and it is known as the loan origination fee. It might be charged by the lender or the broker, depending on the situation. But it should not be charged by both. According to the Federal Reserve, it is “charged by the lender for evaluating and preparing your mortgage loan.”
The origination fee is used to cover a variety of operating costs and administrative services. It also contributes to the lender’s or broker’s overall profits.
2. What is the average origination fee in 2013 - 2014?
This partly depends on where you live. The average cost varies from state to state. It may also vary based on the size of your down payment, as smaller down payments typically result in higher fees and interest rates.
They are typically calculated and expressed as a percentage of the loan amount. The average origination fee ranges from 0.5% to 1% of the loan amount. Lenders and brokers often charge “points” to originate loans. A point is equal to 1% of the loan amount (e.g., $2,000 on a $200,000 mortgage).
According to the Federal Reserve, the median cost of this fee is $2,734 with a 5% down payment, and $2,537 with a 10% down payment. This is the midpoint for origination fees across the country. Your actual costs may be significantly lower or higher than this, depending on where you live and other factors.
Borrowers in some states end up paying much more than the median or average. New York is one of the most expensive states for this particular charge. This is partly due to the fact that origination fees in in New York include taxes levied by the state against lenders. This is just one example of the regional and state-by-state differences in mortgage-related charges.
3. Do I have to pay it? Is it negotiable?
Most of the fees accumulated during the mortgage-lending process can be negotiated. This applies to the origination charge, as well. They are completely negotiable. If you feel a particular broker is charging too much to originate your loan, you can take your business elsewhere.
Just be advised that some lenders will reduce or waive the origination fee, only to increase the actual interest rate applied to the loan. In other words, the lender may be willing to “eat” the fee in exchange for charging you a higher mortgage rate. So it’s a tradeoff between the lower upfront costs (reduced fees) and the higher long-term costs (interest rate).
This is why it’s so important to compare “apples to apples” when shopping for a home loan. You can’t just comparison-shop based on the interest rate. You have to look at points and fees, as well. You have to consider the full cost of borrowing, including all of your closing costs. And speaking of closing…
4. Is it part of my closing costs?
Yes. While the fee is charged on the front end of the process, it is typically paid on closing day. It is one of your closing costs. Your closing costs can include a variety of other charges as well, including fees for home appraisal, title search, document preparation (doc prep), the lender’s attorney and more.
Learn more about closing costs for home buyers.
5. Are these fees applied to refinance loans?
Yes, mortgage origination fees are commonly charged on both purchase loans (for home buyers) and refinance loans (for homeowners). They are negotiable in both cases. In a sense, this cost is more important in a refinancing scenario, because it affects the break-even point at which the refi starts to pay off. If a lender charges a lot in closing costs, it could defeat the purpose of refinancing.
Learn more about the break-even point.
6. Do they apply to FHA loans? VA loans?
Yes, origination fees can be charged on both VA and FHA-insured home loans — and they commonly are. Let’s talk about the FHA first.
The Department of Housing and Urban Development (HUD), which oversees the FHA program, used to maintain a 1% cap on such fees. But the cap was removed at the beginning of 2010, with the issuance of HUD Mortgage Letter 2009-53. According to that letter, and the current version of the HUD handbook:
“FHA expects that lenders will continue to charge fair and reasonable fees for all origination services and the agency will continue to monitor to ensure that FHA borrowers are not overcharged.”
The problem is that there is no quantifiable definition of “fair and reasonable.” So this statement is essentially meaningless. But yes, FHA loans typically have origination fees, just like conventional financing.
VA loans also have them, though the Veterans Administration limits this particular fee to 1% of the loan amount.
7. Are they the same as origination points?
Basically, yes. These two terms are often used interchangeably. Mortgage brokers, loan officers (LOs), and lenders often charge origination fees when creating loans for borrowers. In many cases, they are charged as “points” and expressed as a percentage of the amount being borrowed. For example, a broker might charge one point (or 1% of the loan amount) as a fee for services rendered to the borrower. In this context, the two terms overlap.
In part 2 of this tutorial, we will talk about the origination fee as one of your closing costs, and what you can expect between the initial application process and closing day.
Final notes: This article answers the question, What are mortgage origination fees? Despite the length of this article, we have merely scratched the surface. We encourage you to read the second part of this tutorial (link above), and to continue your research beyond this website. As a borrower, you need to learn all you can about lender’s fees, closing costs, and how they affect the total cost of your home loan.