Loan origination fees are a holdover from yester-year but that doesn’t mean you have to pay them
Loans are expensive but it turns out, they might be even more expensive than you think. That high interest rate isn’t all you’re paying for the money.
Besides tens of thousands in interest you might pay over decades repaying the loan, you could also owe thousands in upfront costs just to get the loan signed. These closing costs and other fees might not be included in your percentage rate but they are most definitely costs.
There’s good news though. Some of these costs, if you know the right tricks, you might get out of paying.
Let’s look at loan origination fees, what they include and how to get around paying them on your next loan.
What are Loan Origination Fees?
The loan origination fee is part of your closing costs for a loan, money you have to bring when you sign the loan to receive funds. While these aren’t the only fees paid for a loan, they generally are a big part of your costs and go to paying the lender for services.
Sometimes these lender services will be broken down on your loan documents under application fee, underwriting fee, and a processing fee. Some lenders may just lump all these together as a single ‘origination fee’.
While this might have been a legit group of costs 50 years ago when everything was done by hand with pen and paper…how much work is it to file or process an application in today’s digital age?
That loan broker or lender is doing little more than a few clicks of their mouse…yet the origination fee remains.
It’s just another way to get more money from you…but that doesn’t mean you have to pay it.
How to Calculate Loan Origination Fees
Your origination fee will be shown as a percentage and as a total amount on your loan documents. Most people focus on the percentage but you really should be looking at both.
To calculate the loan origination fee, add up the individual expenses in your disclosure form. Then take this total divided by your loan amount. That percentage is the origination fee.
- Application Fee $50
- Underwriting Fee $850
- Processing Fee $250
- Total Fees = $1,150
If your loan is for $35,000 then your origination fee is 3.3% ($1,150 divided by $35,000). If your loan is for $220,000 then your origination fee is 0.5% ($1,150 divided by $220,000).
What is the Average Loan Origination Fee?
The average loan origination fee varies but it’s generally from 0.5% to 2% for mortgages and up to 5% for personal loans. Since fees are calculated as a percentage of the loan amount, larger loans will have lower fees.
For example, if a lender is charging $1,200 for all fees on a loan, that origination fee would be 2.4% of a $50,000 loan. The dollar amount of the fees usually doesn’t change so those same fees on a $125,000 loan would be a 1% fee.
Looking at your loan fees and total expenses, be careful not to get these confused with other costs of the loan. Your lender will hire out services like the appraisal, a credit check and might collect fees for government programs. These fees will be shown on your loan documents but are separate from the lender’s origination fee.
When in doubt, have the lender mark everything up on your loan estimate. Make sure they note out, which fees go to the lender and which are to third-party services. This is going to be important when you try to negotiate your loan fees.
Are Loan Origination Fees Negotiable?
YES! Anyone that says origination fees are not negotiable is either the one collecting the fees or doesn’t know what they’re talking about. Some lenders don’t even charge origination fees anymore so you better believe they’re negotiable anywhere!
But you need to know how to negotiate them.
First you need to shop your loan around, checking rates and fees at different lenders. It’s going to be a balancing act between fees and interest rates. If you can get a much lower rate from a lender, the higher origination fee might be worth it.
Don’t worry about too many inquiries on your credit hurting your score. Loan requests made within a 30-day period are counted as one inquiry against your credit score. Some loans including personal loans and debt consolidation do a soft inquiry that doesn’t even get reported on your credit. Either way, shop your loan around, get your loan and it won’t matter what happens to your credit score in a month from now.
Once you’ve check your rates and fees on a few lenders, you’ll know where you stand to negotiate.
Don’t ask for loan fees to be eliminated entirely. That’s a quick NO from lenders and it will shut off the negotiations. Instead, ask first if there is anything in the process you can do that will shave some money off the fees.
Most likely, they’ll say no to this. Come back and say, “Honestly, I’m just trying to figure out a way we can lower these loan fees because I’m not ready to pay $X when I’ve found loans at [Lender A] and [Lender B] that don’t charge a fee at all.”
Watch out for lenders that agree to drop your loan fee but raise the interest rate. This can still work if the math comes out to where you’re saving money but usually it means much more money to the lender over the long run.
Are Loan Origination Fees the Same as Points?
Loan fees and points are two completely different things.
A discount point is an optional charge where you put money up front to buy interest off your loan. Each ‘point’ you buy will increase your closing costs but it will usually decrease your interest rate by one-percent.
If you think you might have trouble paying closing costs and the loan fees, there’s also a thing called ‘negative points’ that might be able to help. Just as discount points require more money upfront but lower your interest rate, negative points lower the amount you pay upfront but increase your interest rate.
I’m not saying lenders and loan brokers shouldn’t get paid for helping you get a loan. That’s what the interest rate is for and can add up to tens of thousands of dollars. People shouldn’t have to pay loan origination fees and you won’t if you know the tricks to lower your fees. Lenders want your business, they want that interest on your loan. Make them work for it and don’t pay every fee they want to charge you!