What Is Included in Lender Fees (Origination Fees)?
An origination fee is a fee charged by a lender for providing a service for a new loan application. In order to issue a loan, lenders need to complete a number of necessary procedural tasks, including checking the borrower's identity and credit status, verifying all of the borrower's supporting documents, conducting related assessments, preparing relevant contract documents, and other processes as needed. In order to compensate for the costs incurred by these tasks, lenders charge borrowers an origination fee, which is quoted as a percentage of the total loan amount, generally between 0.5% and 1% in the United States. Usually, before the borrower receives the loan, the origination fee has been deducted already, and so the borrower will actually receive a loan amount that is less than the amount for which the borrower applied.
Similar to negotiating better mortgage terms, you can negotiate origination fees with your lender. You may be able to obtain a lower origination fee, but you will need to concede something else to the lender. The most common way to reduce the origination fee is to offer to pay a higher interest rate. Effectively, the lender will be compensated for loan processing from the increased yield from interest payments rather than from an origination fee.
Generally speaking, whether to negotiate the origination fees or not will depend on your mortgage strategy. If you prefer to minimize your monthly payments, you can choose to pay higher origination fees up front to get a lower monthly interest rate. On the other hand, if you plan to sell your home or refinance your loan within a short period, you will save more by reducing your upfront fees, which means negotiating the origination fee with your lender, decreasing that fee and accepting a higher interest rate.