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Mortgage origination fee: Details, costs, and options for paying less

Yahoo Personal Finance· Getty Images
Updated 5 min read

When you buy a house, you may be surprised by the number of expenses involved in getting a mortgage. You’ll pay most of the bill on closing day, but even closing costs are broken down into several separate charges, including an origination fee.

We’ll explain what a mortgage origination fee is and how it works. That way, you can handle this significant financial transaction with confidence.

Learn more: What to expect when closing on a house

An origination fee is an expense lenders charge you to get a mortgage. The fee covers the lender’s costs to process your home loan application and issue financing while generating a profit for the company, said Casey Fleming, mortgage adviser and author of “The Loan Guide,” via email.

Depending on your lender’s practices, your mortgage origination fee may include an application fee, underwriting fee, or administrative fee.

Fleming explained that the lender may display these fees as one lump sum, break down the fees individually, or bake the fees into your interest rate and discount points.

“[The cost] varies dramatically by location, property type, and lender,” Fleming said. “There's no way to put a number on this that would be relevant to a nationwide audience.” However, as a general rule of thumb, you can expect to pay between 0.50% and 1% of your loan amount to cover your origination fee.

For example, let’s say you take out a $450,000 mortgage with a 1% loan origination fee. In that case, you’d pay $4,500 in origination charges.

While the fee can be a significant sum, it was typically much higher prior to the housing crash of 2007 to 2008. Before the crisis (and resulting legislation limiting lender fees), lenders charged as much as 5% of the loan amount. So, if you borrowed $450,000 in 2006, your origination fee might have been as high as $22,500.

Fleming said non-qualifying mortgages (loans issued to those who might struggle to qualify for a traditional mortgage due to factors such as self-employment) generally carry higher origination fees than conventional loans.

You can find your origination fee on page two of your loan estimate under “origination charges.” Your lender must give you a loan estimate, which spells out all the costs associated with your home loan, within three days of receiving your mortgage application. This document can help you compare rates and fees between multiple mortgage lenders, empowering you to select the home loan that works best for you.

If applicable, you may also see discount points listed as an origination charge in your loan estimate. While it’s not required, you can purchase discount points to lower your mortgage interest rate.

Dig deeper: How much house can I afford?

Generally, you’ll pay your loan origination fee on closing day, along with your other closing costs. However, you may be able to roll the expense into your home loan instead so that it’s added to your mortgage principal balance.

Rolling the fee into your mortgage may leave more money in your pocket today. However, doing so increases how much you borrow, which means your monthly home loan payment will be higher. Plus, you’ll pay interest on the amount rolled into your principal, ultimately making it more expensive than if you paid the origination fee upfront.

While a fee reduction isn’t guaranteed, there are several things you can try to lower the expense:

  • Negotiate with the lender. Lender fees aren’t always set in stone, so it’s wise to see if the bank will budge to earn your business. If you can show that you’ve been prequalified with another mortgage lender offering a lower origination fee, you may have some negotiating power.

  • Ask for lender credits. The opposite of discount points, lender credits reduce your upfront fees in exchange for a higher interest rate.

  • Ask for seller concessions. If the seller is motivated to close the deal, they may agree to cover some or all of your origination fees. This approach is more likely to work in a buyer’s market than a seller’s market.

  • Ask about builder incentives. If you’re building a home, a builder may offer to cover the origination fee to incentivize you to go through their company.

  • Research home buyer assistance programs. First-time home buyer programs offer loans or grants to help with your down payment and closing costs. Applying for one of these programs could offset the cost of your origination fee.

Ultimately, your best move is to get quotes from multiple mortgage lenders. Doing so can help you identify the lender you want to work with and give you leverage in the negotiation process. Fleming said it’s best to get your quotes as close together as possible because rates and discount points can change frequently. By getting all of your quotes in a short time period, you’ll have a more accurate comparison.

Read more: The best mortgage lenders for first-time home buyers

You may get a tax break if you buy discount points, which are listed in the origination fee section of your loan estimate — even if the seller pays for them. However, according to the IRS, you can’t deduct what you pay for the lender to prepare and issue your home loan (the actual origination fee). You should speak with a local tax professional about your situation before filing your tax return.

Learn more: How a mortgage interest tax deduction works

Your total closing costs will typically be 3% to 5% of your mortgage amount, though they could be higher. Other potential expenses include, but aren't limited to, escrow fees, attorney fees, prepaid property taxes, and prepaid homeowners insurance.