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The dictionary definition of origination is that something is coming into being or coming into existence. In finance, this is most commonly used in the context of loans. When a person first takes out a loan, when the papers are drawn up and the money is actually lent, that is referred to as origination.
Most commonly, the term is used with mortgages, although it can be used with any type of loan. Origination is rarely used to describe the opening of a credit card, but instead primarily deals with loans opened or issued by a bank. Generally, it is considered to occur at the time when the loan documents are signed.
Fees are common at the point in which a loan originates. These are often referred to as origination points, and are based on either a flat fee cost assessed by the lender or a fixed rate. Such points are different from discount points, which are points that a home buyer pays to reduce the interest rate on his mortgage. Discount points are tax deductible and are often optional, while points or fees paid to originate a loan are not optional.
A bank or lender must declare whether there are any costs to originate at the time of the loan. An application fee is often considered such a cost, since it is necessary for a loan to come into existence. Generally, the purpose of fees or points paid when a loan originates is to compensate the lender for the process of underwriting the loan.
When shopping for a loan, many buyers seek a loan that has no origination costs. This does not mean the loan will be no cost: other fees, such as title insurance, may still be charged. It simply means that no fee is charged solely for the purpose of originating or opening the loan.
When origination fees are charged, they must be factored into the total cost of the loan. When an interest rate comparison is done among multiple loans, the difference in cost to open or originate the loan can be considered to determine the true cost of the loan. If a borrower can find a different bank willing to offer comparable terms with no cost to originate, the borrower will normally opt for the bank with the lesser fee or can try to negotiate the reduction of the fee with his original lender.
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