Learn something new every day
More Info... by email
An origination fee refers to the cost associated with establishing an account with a banker, broker or lending firm. Also called an activation fee, origination fees are common when a loan is issued. For example, if an individual takes out a personal loan or a mortgage, he or she may pay an origination fee.
The cost of the origination fee varies depending on the situation. Typically, it is a set rate determined by the bank. It is usually the cost of filling out the application to begin the process of applying for the loan.
The origination fee, most commonly, is based on a percentage of the total loan amount. This means the more an individual borrowers, the higher the origination fee will be. The percentage taken varies depending on the lender and type of loan, but a .5 percent to a 2 percent fee is common.
Origination fees may also be referred to as points. Each 1 percent that is charged is called a "point" on a loan. Under some loan structures, individuals can pay more points to obtain a lower interest rate.
An origination fee does not necessarily exist for all types of loans. Such a fee is very common in mortgage loans. The origination and activation fee for mortgage loans are generally rolled into the "closing costs" of a mortgage. Such fees are also common with business loans as well, and usually must be disclosed to perspective borrowers within three hours of applying for the loan.
Banks or other lenders generally make the cost of originating the loan clear when an individual expresses interest in applying for a loan. In cases where an individual shops around for loans, the origination cost of the loan is included when the bank issues a good faith estimate as to the projected cost, fees and interest charged on the loan. The origination cost will be located on the top of these good faith estimate documents, so the borrower can have a true understanding of how much his loan will cost.
Sometimes, a borrower may be able to negotiate with the lender to get the lender to waive or eliminate the origination fee associated with a loan. In other cases, the borrower will "roll" the origination fee into the cost of the loan. For example, this means the borrower would borrow 1 percent more in the case of a 1 percent origination cost, with that 1 percent going toward paying the loan fees.
One of our editors will review your suggestion and make changes if warranted. Note that depending on the number of suggestions we receive, this can take anywhere from a few hours to a few days. Thank you for helping to improve wiseGEEK!