An article going over what origination fees are and why they will probably show up as a fee when getting a loan for your property purchase.

Whenever you’re going to make a large change in your life like buying a new car, going to school, or purchasing a property, it usually will require you to get a loan. When that loan is received, you may have noticed a fee attached to that loan and wondered what it is or more importantly–why is it attached to your loan. In this article, we will be answering those very questions! 

This fee that is attached to your loan can go by a few different names:

• Origination Fee

• Administrative Fee

• Processing Fee

• Underwriting Fee

The names of these fees are indicative of the purpose and reason for these fees existing attached to your loan or mortgage. An origination fee’s purpose is to pay for the services of processing or completing your loan transactions. These services could include preparing documents, processing applications, or for the underwriting of your loan.

However, these fees can be administered in a couple of different ways–either the lender could have the fee paid upfront but more commonly the fee is rolled into the total amount of the loan so that it can be paid with the loan over time.

How Do Origination Fees Work?

Now that we’ve gone over what origination fees are, the next step is to review how these origination fees work and how the workings of these fees will affect you as a lendee. A good thing to remember is that the cost of origination fees can vary widely depending on an assortment of variables:

• Type of loan: Typically, the larger the loan, the smaller the origination fee will be because whether it’s a $50,000 loan or a $500,000 loan, the amount of work that the lender will have to do will be the same. It’s because of this that lower loans can see a higher origination fee. 

• Credit history: A lender is still running a business so when approached by a lender with a lower credit score, the lender could charge a higher percentage for their work in an attempt to minimize risk of loss.

Lender chosen: As with any business, some businesses operate with lower and higher prices. For example, Upgrade–a personal loan company–usually charges 8% for their origination fees while some other companies will charge between 1% to 10%.

Some other factors can be taken into account when the lender is giving their price for origination fees–a couple of these factors include total income, liabilities of the lender, and the assets of the lender. However, these variables aren’t as prevalent or weighed as the previous three factors listed above.

Now, not all loans and lenders will charge an origination fee but that doesn’t necessarily make those fees the cheaper or better route to take. Lenders are still running businesses so even the ones that do not charge origination fees will try to make profits through higher interest rates or through prepayment penalties. As with most financial decisions, when choosing a lender to loan from, be sure to do diligent research and see what other costs might be attached to the loan. A takeaway from this portion of the article is that even a loan with origination fees could still end up with a lower overall cost.

Average Cost

The prices of the origination fee can vary widely as explained above but there are some common practices that can make predicting the fee’s amount easier. Typically, the fees of a loan will be charged as percentages of the loan.

However, it is probably good to remind you that certain types of loans will incur a larger origination fee. For example, personal loans typically will charge higher percentages for their fees where most personal loan companies will sit between 1% to 10% while mortgages usually will charge between 0.5% to 1.5% of the loan. 

Other Fees: 

On top of the origination fee, there will be other fees that you will see attached to your loan. However, while most of these fees will depend on the type of loan taken out, you will most likely see these fees attached when taking out a loan:

• Appraisal Fee: This fee is most commonly associated with home loans and covers the costs of having a property’s value appraised. 

• Late Fees: This fee is pretty self-explanatory and should come as no surprise that most types of loans have a fee attached to the tardiness of payment.

• Prepayment Fee: This one may seem odd to those new to taking out loans. However, most loan types will include a fee if you pay all of or most of your loan early.

This article covered a good portion of what an origination fee is and how it will affect you as a lendee but there are still variables and situations that were left out so when taking out a loan, be sure to do your research and examine all of the fees associated with your loan. Lastly, if you find yourself overwhelmed by the process of picking out the right mortgage, do not be afraid to reach out to one of the many talented real estate agencies located throughout Tucson, Arizona!