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You probably heard the term “loan origination fee” as you fish out loans to apply for. This term is one of the most important aspects of a personal loan to know about.
Furthermore, it’s easy to think that these fees are necessary to pay, but they’re not. Even though it’s become the norm, you can obtain a loan without considering paying loan origination fees.
What is an Origination Fee?
Here is a simple definition.
Loan origination is the act of applying and the lender processing a home loan.
The loan officer addresses this at the start of your loan application process. They also sum up this process at the loan closing. On top of that, lenders apply a loan origination fee for compensation of the service they provide.
So you may be wondering what does this mean in dollar amount. This is contingent on the amount you need to borrow. The fee is typically between 0.75% and 1.5% of the loan amount. For instance, if your home loan is $300,000, you’ll pay a fee that’s between $2,250 and $4,500.
As you can probably already know, lenders discuss the loan origination fee at the beginning.
The lender applies this fee to cover their effort to get you to apply, your application process, and gathering additional information about your financial journey.
This information determines whether or not the lender pre-qualifies you for a loan.
The Average Percentage Of Loan Origination Fee
This type of fee is contingent upon the loan amount and/or the value of your home.
Mortgage Loan Origination Fee
The lender computes this fee as a percent of the total mortgage. No matter how much work the lender puts in, mortgage loans that are high in value will have a higher loan origination fee than those of low value. In a nutshell, the fee is typically 1% of the total amount of the mortgage loan.
Personal Loan Origination Fee
If you apply for a simplistic loan that lenders typically approve, your fee may be low. Moreover, lenders are aware of the fact that people can go anywhere to get loan approval. As a result, a lender might not charge this type of fee. If they do charge, it will be lower than what they’d usually charge.
If the lender has to do a lot of work, the origination fee will be higher. A loan type that most lenders don’t typically approve is another reason they may charge a higher fee. A lender has many types of loans, know which type he will approve in comparison to the ones he won’t.
Loans that are risky pose less competition for lenders. Lenders are able to charge higher fees due to the amount of work they provide and the risk of default.
Another key point is the loan amount. The smaller the loan, the lower the origination fee will be. Moreover, this allows the lender to make up for the low commission. If you borrow a low amount, the lender won’t have much of a profit. This is why they will charge a higher loan origination fee.
You can see how much they’ll charge by looking at the loan estimate.
The government requires lenders to send this documentation within 3 business days of receiving your personal loan application. The following is what the document includes.
- Potential interest rate
- Monthly payment
- Estimated closing costs (including the origination fee)
It’s your money – Do Your Math and Calculate
Some lenders may advertise that they don’t have prepayment penalties. What they don’t tell you is that the origination fee acts as one in disguise.
If you qualify for a loan where the lender doesn’t require a loan origination fee, you’ll save a lot of money, theoretically.
Getting a no-fee loan doesn’t mean that the loan will be cheaper. The bottom line is that the lender has to make up for the fee somehow.
Depending on how fast you can pay off your loan, the actual cost of the loan will vary. The example below insinuates that you pay a 1.5% origination fee. It also illustrates a $10,000 loan for 24 months with a 1.5% origination fee. Here’s a visual for you.
Example of a loan origination fee calculation: 0.015 * 10,000 = $150
- If you plan to pay back the loan within a span of 6 months with a 25% interest rate, it’d be better for you to get a loan that has an APR up to 29.87% without the origination fees.
- If you plan to pay back the loan within 12-month span with a 20% interest rate, it’d be better for you to get a loan that has an APR up to 22.65% without origination fees.
- If you plan to pay back the loan within a span of 24 months with a 15% interest rate, it’d be better for you to get a loan that has an APR up to 16.3% without the origination fees.
How To Lower The Loan Origination Fee
This type of fee is not required. Some lenders charge them and others don’t.
The fee itself can be negotiable. Moreover, the more money you want to borrow, the more you can negotiate. If you pay more per month on your mortgage than the person next to you, that doesn’t mean that your application process is longer.
Take this for instance. There are two loans. One is $400,000 and the other is $100,000. Both individuals have the same credit score, debt ratio, and income. On top of that, they are low-risk loans. The lender they typically use charges a 1% origination fee. Regarding the $400,000 loan, it’s $4,000. IN regard to the $100,000, it’s $1,000.
There is a major difference between the two.
If the application process has the same amount of workload, the lender may be willing to negotiate on the $400,000 loan amount than the $100,000 one.
If the lender decides to charge 0.5% on the $400,000 loan, they end up making a profit of $2,000. Moreover, this is still $1,000 more than what they would have made on the $100,000 loan.
If you decide to take a higher interest rate, lenders would be more prone to negotiate on the loan origination fee. One thing to note is that this fee does not lower your rate. The lender does profit from it though. If you want a lower origination fee, the lender will increase the interest rate to compensate for the low origination fee. As of result, the lender will make get their money over the lifespan of the loan.
Negotiation of Loan Origination Fee
The fee itself is not set in stone. You can negotiate the fee to a lower amount if you want to. Having good credit gives the lender more incentive to negotiate on the fee. In addition, you can request a flat-rate loan processing fee.
You can also avoid paying the loan origination fee if you request the seller of the house to pay for it. If the seller is in a hurry to move or doesn’t want to deal with the selling process no longer than he has to, he or might go ahead and pay the fee for you.
Decide What’s Important to You
Depending on your borrowing needs, the lowest cost option may not always be the best fit. You may be willing to pay the origination fee to get a lower monthly payment.
Moreover, you may not even have the best credit score, and the lender requires an origination fee for the loan you want. Lenders that have a lenient credit policy typically include this fee. Above all, if you consolidate debt and really need the loan, paying the origination could be unavoidable.
You may even consider paying the fee if the loan is exactly what you need. The main way to discover this is to do your own research in regards to the loan and lender of choice.