Origination Fee
Candlefocus EditorFor those who are unfamiliar, a point is a unit of measure used to calculate the total loan cost. One point is equal to 1% of the loan amount, so a loan of $100,000 with one point would have an origination fee of $1,000. Origination fees are usually set in advance, so it is important to understand them when considering a loan.
Although the origination fee is set in advance and cannot be avoided, it may be possible to negotiate a lower rate. Generally, a lower origination fee generally comes with a higher interest rate, so it is important to weigh the additional costs over the life of the loan when deciding. For example, if the origination fee for a home loan is 1% and it can be negotiated down to 0.5%, the total cost over the life of the loan will have to be lower in order for it to still be a good deal.
In addition to the fee, the borrower is typically responsible for other closing costs, such as appraisal and title fees, which are included in the total loan cost. It’s also important to understand that lenders can charge a discount fee, which is typically 1% to 2%, to cover the cost of processing the loan and reducing the interest rate. So, even if an origination fee was negotiated and lowered, the lender could still charge a separate fee to cover the cost of the discount. Therefore, it’s important to negotiate all the fees and costs before agreeing to a loan and to read all the loan documents carefully before closing.
When considering a loan application, it’s important to keep the origination fee in mind. Sure, having a lower origination fee may seem like a good deal, but in the end, a higher rate may be the more prudent option if the total cost over the life of the loan is lower. By understanding the origination fee (and all other loan costs) upfront, it will be easier to pick the loan that’s right for you.