There are different ways for a lender to make a profit on a loan. One of the ways most of us are familiar with is by charging interest. But another way is by charging upfront origination fees.
When you're shopping for a loan, you'll want to be sure to compare origination fees (sometimes considered "hidden" fees) as they can have a big impact on how much you pay overall. Here's what you need to know.
What is an origination fee on a loan?
A loan origination fee is what a lender charges for the administrative costs of providing the loan for the borrower.
For example, Achieve personal loans and NetCredit personal loans include origination charges as a percentage of your loan. When you're looking for personal loans, it's important to consider this fee alongside the average personal loan interest rates, as both will affect the total cost of your loan.
For a mortgage, the loan origination charges can be found in the top left-hand corner of Section A on page two of your Loan Estimate provided by your lender.
Lenders are required to send your Loan Estimate within three business days of receiving your application. And while certain parts of your final Closing Disclosure could differ from your Loan Estimate, generally the origination fees must stay the same.
Loan origination fees are governed by consumer protection laws like Regulation Z, which enforces the Truth in Lending Act (TILA) and requires lenders to clearly disclose all fees and the loan's APR. The Dodd-Frank Act further strengthened these protections by creating the Consumer Financial Protection Bureau (CFPB) to oversee fair lending practices.
How loan origination fees work
Mortgage origination fees
Some mortgage lenders charge a flat origination fee. Other mortgage lenders may charge a percentage of the loan amount, generally 1% or less.
As of current mortgage trends, mortgage rates are expected to decline slightly in 2025 but likely won't return to the historic lows seen in 2020 to 2021. Considering this, be sure to evaluate your mortgage origination fee terms carefully, as even small differences can significantly impact your total borrowing costs.
Home equity loans and HELOC origination fees
Home equity loans and home equity lines of credit (HELOCs) may also come with origination fees, although they're often lower than traditional mortgage loan fees. These can be either flat fees or a percentage of the loan or credit line, commonly ranging from $0 to 1%. Some lenders promote no-fee HELOCs or cover closing costs, but these offers might require you to keep the account open for a certain number of years or pay a penalty if you close early.
Personal loan origination fees
For personal loan origination loan fees, you could pay anywhere from 1% to 8% of the loan amount, depending on the lender. However, many of the best personal loans do not charge an origination fee at all. The percentage that you're charged for a personal loan origination fee can depend on a variety of factors, including:
- Your credit score
- Your income
- Your loan amount
- Your loan length
- Whether you need a co-signer
Some personal loan lenders allow for the origination lender fees to be deducted from your loan amount. If you're considering a personal loan instead, take time to review your personal loan preapproval details to ensure you're getting the best possible terms.
For example, let's say you need to take out a $20,000 personal loan to finance a medical bill and the loan comes with a 5% origination fee ($1,000).
If the origination fee is deducted from your loan, your actual payout will be only $19,000 ($20,000 - $1,000). So if the full $20,000 is needed for your medical bill, you'd need to take out a slightly larger loan.
Should you buy discount points?
Discount points — either full points or a fraction of a point — can buy down your interest rate.
A discount point will generally cost you 1% of your total amount. So for a $200,000 mortgage, one discount point would raise your origination costs by $2,000 (1% of $200,000). And two discount points would raise your origination costs by $4,000 (2% of $200,000).
You can typically expect to earn a 0.25 percentage point interest rate deduction for every point that you pay. So if you were originally quoted an interest rate of 6.50%, paying for two discount points could drop your mortgage rate by 0.50 percentage points to a flat 6.00%.
If you're trying to decide whether or not paying discount points would be worth it, consider how long you plan to stay in your home.
For example, let's say you paid $2,000 for a discount point and your lower APR will save you $50 per month on your mortgage. In that case, it will take you 40 months to break even on the decision ($50 x 40 months = $2,000).
The longer you plan to stay in your home, the more benefit you'll get out of paying for discount points. But short-term homeowners may want to stick with their original quoted rate.
What about lenders that don't charge origination fees?
A common marketing tactic in the lending industry is to advertise "no origination fee loans." But before you get too excited, make sure that you're not paying for the lender's services in other ways.
For example, some lenders may make up for the lack of an origination fee by tacking on hidden fees like late payment penalties or non-sufficient funds (NSF) fees. That's another reason why it's important to shop around with multiple lenders before you take out a loan.
Many of the best ways to borrow money involve finding loans that don't charge an origination fee at all.
Predatory lending and loan scams
While shopping for loans, be cautious of predatory lending practices. These lenders target vulnerable borrowers with high fees, unreasonably high-interest rates, and deceptive terms.
Loan scams often prey on people who are desperate for financial assistance, which can lead to loans that are far more expensive than necessary. Always ensure that any loan you consider aligns with industry standards and does not charge any unnecessary lender fees.
Impact of loan origination fees
While origination fees are a big cost, they need to be considered in light of other loan factors. For example, it may be worth it to pay a higher origination fee to secure a fixed interest rate on your loan as opposed to a variable rate.
Additionally, if you're in the process of building your credit, choosing a loan that reports to the credit bureaus and offers favorable terms might help improve your credit score over time. A well-managed loan can positively impact your credit history, making future borrowing more affordable and easier to secure.
Loan origination fee FAQs
Are origination fees included in the APR of a loan?
Yes, origination fees are part of how the Annual Percentage Rate (APR) of a loan is calculated. A loan's APR represents the total cost of borrowing including interest and other fees.
Can I avoid paying a loan origination fee?
Yes, not all lenders charge origination fees. You may be eligible for the best loans without origination fees if you shop around. It also may be possible to negotiate the fee with your lender.
What is a typical loan origination fee?
A typical loan origination fee ranges from 0.5% to 1% of the total loan amount. For example, if you're taking out a $100,000 loan, the origination fee might be between $500 and $1,000.
Do you pay origination fees up front?
On personal loans, your origination fee will likely be deducted from your loan proceeds and paid up front when you get your money.
Is an origination fee paid out of pocket?
Origination fees on personal loans typically aren't paid out of pocket; instead, the fee will be deducted from your loan amount. So if you have a $50,000 loan with a $1,000 origination fee, you'll only receive $49,000 when your funds are disbursed.
