What Is a Loan Origination Fee, and How Does It Work?

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Updated on Tuesday, January 19, 2021

A loan origination fee is charged by the lender and can also be referred to as an application, processing or underwriting fee. Its purpose is to cover the costs of preparing documents, processing and underwriting your loan and any third-party fees that are incurred along the way.

How much your loan origination fee will cost depends, in part, on the type of loan you’re applying for. In some cases, you may be able to reduce the amount you pay or waive the fee entirely. Keep reading to learn what to expect in origination fees for different loan types.

In this guide, you’ll find…

How loan origination fees work

If you’re deciding between lenders, one criteria you might want to take into account is the difference in their origination fees. There are some key points to consider, depending on the type of loan you’re applying for:

Personal loans

Average personal loan origination fee: 1% to 8%

As personal loans are typically unsecured and not backed by any collateral, you may find the highest origination fees in this category. Because these types of loans carry more risk for lenders, they may charge you anywhere between 1% to 8% of the total amount you are borrowing. Those higher fees also offset the lower amount of interest lenders like banks and credit unions will receive during the life of a personal loan. These loans tend to be extended for a shorter term and in smaller amounts than other kinds of loans.

If your personal loan comes with no origination fee, be aware that the lender may make up for it some other way, such as charging higher interest rates.

Mortgages

Average mortgage origination fee: 0.5% to 1%

Mortgage loan origination fees — also called mortgage points — can vary drastically as they are determined by the lender. These fees are charged to cover the labor involved in the processing, underwriting and funding of a mortgage, as well as third-party fees incurred in tasks such as verifying your employment.

Many lenders, such as banks, credit unions and brokerages, charge a flat origination fee. This means the fee is not based on the amount you borrow. Others could charge a 0.5% to 1% origination fee; the VA home loan program sets a cap at 1%.

At the beginning of the mortgage application process, lenders must disclose the exact origination fee being charged in an official loan estimate form. Lenders may not increase the stated fee except under special circumstances, such as if you decrease your down payment or change your type of loan. However, you could negotiate it downwards depending on your credit score, and the size and duration of your requested loan.

As long as you meet certain criteria outlined in IRS Publication 530, your mortgage loan origination fees may also be tax deductible.

Federal student loans

Average federal student loan origination fee: 2.75% to 5.30%

Origination fees for federal student loans are set by the government and may vary depending on whether you have a direct subsidized, direct unsubsidized or direct PLUS-type loan. Those fees could range from 2.75% to 5.30% and are deducted from the loan amount — meaning you get a smaller loan in the end but will still pay back the full amount.

For example, if you were to take out a $10,000 loan with a 4% origination fee, you would only receive $9,600 but would have to pay back the entire $10,000.

While student loans provided by private lenders such as credit unions and banks might not come with origination fees, they could cost you more in the long run by charging higher interest rates. Private student loans also don’t come with the federal protections that are standard with federal loans.

Keep in mind that loans with lower interest rates but higher fees can cost more than loans with a higher interest rate and no fees. An easy way to calculate whether your lender is giving you a good deal is to remember that 3% to 4% in fees is equivalent to a 1% higher interest rate.

Loan origination fee FAQ

To get the big picture outlook of whether you’re getting a good deal on your loan, make sure you’re not just comparing the origination fees but also factoring in the interest rate. Lenders are required to give you the APR of your loan, which includes all costs of borrowing — including origination fees and interest rates. The lower your APR, the less your loan will cost over time.

Your lender may charge this fee to cover the administrative and customer service costs involved in putting together your loan. This may include preparing loan documents, processing your application, verifying your information and checking whether or not you qualify for the loan.

Origination fees are not required, so it’s at the lender’s discretion to waive or negotiate the fee.

Typical loan origination fees vary between lenders. Each one sets their origination fees based on several factors, including the type of loan you apply for, the amount you borrow, the length of your loan term, your credit score, your credit history and the presence of a cosigner. The main exception to this rule are federal student loans, as their fees are set by Congress and cannot be negotiated.

Origination fees are usually charged as a percentage of the total amount borrowed, but it can sometimes show up as a flat fee instead. If your lender charges you a percentage of the money you borrow, simply multiply that percentage by your total loan amount. For example, if you’re charged a 1% fee on a $5,000 personal loan, you’d pay an additional $50 for the origination.