Loans What Is an Origination Fee? By Anna Baluch Updated on November 11, 2021 Reviewed by Cierra Murry In This Article View All In This Article How Origination Fees Work Do I Need To Pay Origination Fees? Average Cost of Origination Fees Alternatives to Origination Fees Frequently Asked Questions (FAQs) Photo: kupicoo/Getty Images Definition An origination fee is charged by a lender to cover the costs of processing a loan. It may be used to pay for preparing documents, processing your application, or underwriting your loan. In most cases, the fee is quoted as a percentage of the total loan amount. Key Takeaways An origination fee is what a lender charges for processing a loan.Typically, an origination fee is a percentage of the total loan amount borrowed.While origination fees aren’t required, many lenders who waive them charge higher interest rates or other fees. How Origination Fees Work An origination fee is money a lender may charge you to complete a loan transaction. Many types of loans, including personal loans, student loans, auto loans, mortgages, and home equity loans, come with origination fees. You may have to pay an origination fee upfront when you close on your loan. Alternatively, the fee may be deducted from your loan proceeds or rolled into the total loan amount so you can repay it over time. Not all origination fees are created equal. The type of loan you take out, your credit history, and the lender you choose may affect the amount of your origination fee. For example, one lender may charge an 8% fee, while another lender might charge 3%. Once you get approved for a loan, the lender will deduct the origination fee from your total loan funds. An Example of Origination Fees Let’s say you take out a personal loan for $5,000 that requires you to pay a 3% origination fee. You’ll be on the hook for $150 (3% of $5,000). If the lender deducts the origination fee from your loan at the beginning, you’ll only receive a loan amount of $4,850. This is important because if you actually need $5,000 for whatever expense it is you’re using the loan for, you’ll need to take out more than $5,000 to account for the origination fee. Note If you believe an origination fee is too high, ask your lender if they’ll lower the fee or even waive it. There’s no guarantee that negotiating will work, but it’s worth a shot, especially if you have good credit. Do I Need To Pay Origination Fees? While an origination fee is not a requirement for all loans, many lenders charge them to cover the costs of things like gathering documents, verifying the accuracy of the information provided, requesting information from employers, and ensuring your application meets certain criteria. Note While some lenders advertise “no origination fees,” they may charge you a higher interest rate or another fee to make up for it. So it’s a good idea to compare your options and do the math. You may find that a loan with an origination fee is more affordable than a similar loan without one. Average Cost of Origination Fees Origination fees are typically a percentage of the total loan amount, and they vary significantly depending on the type of loan, the lender, your credit history, and other factors. If you take out a home loan, for example, your origination fee may range from 0.5% to 1% of the amount you borrow. A personal loan may require you to pay a higher origination fee of 1% to 10%, depending on your credit. While these percentages may not seem like a lot, they can add up depending on the size of your loan. For example, if you take out a loan for $5,000, a 1% origination fee is only $50. However, if you take out a loan for $50,000, the origination fee is $500. Alternatives to Origination Fees In addition to origination fees, you may have to pay other fees when you take out a loan. While these fees differ by loan type, you may encounter a few of the following when shopping for a loan: Appraisal fee: An appraisal fee, which is widely seen in home loans, pays for the cost of having a property appraised. It's intended to ensure the loan is large enough to cover the value of a home you intend to buy. The cost varies based on your home’s location, the appraiser’s experience, and the complexity of the process. Late fee: Depending on your lender and type of loan, if you don’t make your payments on time, you may have to pay a late fee. Prepayment fee: Lenders of various loan types may charge a prepayment fee if you pay off all or part of your loan early. Before you sign on the dotted line and accept any loan, make sure you’re aware of all of its fees. The fees should be clearly outlined in your loan agreement, but if they’re not, or if you’re unclear about a certain fee, don’t hesitate to ask the lender. Frequently Asked Questions (FAQs) What is the purpose of an origination fee? Lenders typically charge origination fees to cover the cost of processing a loan, which includes preparing documents and underwriting. Who usually pays the origination fee? In most cases, the person applying for the loan is the one who pays the origination fee, whether it's a mortgage or a personal loan. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Quicken Loans. "Mortgage Origination Fee: Everything You Need To Know." LendingClub. "Personal Loan Rates and Fees." OneMain Financial. "Loan Fees." American Society of Appraisers. "Appraisals FAQ Everything You Want To Know About Appraisals and Appraisers." Consumer Financial Protection Bureau. "What is a prepayment penalty?"