One thing you should always look out for — regardless of the type of loan you’re applying for — is loan origination fees. Many lenders charge origination fees for new loans to help cover costs on their end. However, what these fees are called and the amount of these fees can vary quite a bit from lender to lender.
Before you settle on a lender, here are some things you need to know about origination fees, so you can make the best borrowing decision for your financial situation.
What Is a Loan Origination Fee?
An origination fee is a cost the lender charges for a new loan. It’s a one-time fee charged at the time the loan closes. The fee covers the costs the lender incurs for processing and closing the loan.
How Are Origination Fees Determined?
Loan origination fees depend on a number of factors. This includes:
• Loan type
• Loan amount
• Credit score
• Inclusion of a cosigner
• Your financial situation, including assets, liabilities, and total income
Do I Have to Pay Origination Fees?
You don’t necessarily have to pay origination fees — while most lenders charge this fee, not all do. Additionally, origination fees may be negotiable. If you ask, a lender could simply lower the fee, or they could offer a credit to offset at least a portion of the origination fee. Or, they might agree to lower the fees if you’ll pay a higher interest rate.
To minimize the sting of loan origination fees, it also pays to research your loan options. Make sure to compare how much you’d pay overall for different loan offers, factoring in the term of the loan, the interest rate, and any fees.
One way to effectively compare and contrast different loan options is to check each loan’s annual percentage rate (APR), an important mortgage basic to understand. A loan’s APR provides a more comprehensive look at the cost you’ll incur over the life of the loan. This is because APR factors in the fees and costs associated with the loan, in addition to the loan’s interest rate.
The Truth in Lending Act requires all lenders to disclose an APR for all types of loans. You’ll also see any fees that a lender may charge listed there, including prepayment penalties.
How Much Are Loan Origination Fees?
How much a lender charges (and what the fee is called) varies based on the type of loan and the lender.
A traditional origination fee is usually calculated based on a percentage of the loan amount — and that percentage depends on the type of loan. For a mortgage, for instance, an origination fee is generally 0.50% to 1%. Origination fees for personal loans, on the other hand, can range from 1% to 8% of the loan amount, depending on a borrower’s credit score as well as the length, amount, and sometimes intended use of the loan.
There are a variety of other origination fees that lenders may charge, and these can be a flat amount rather than a percentage of the loan amount. Other fees that lenders may charge to originate a loan could be called processing, underwriting, administration, or document preparation fees.
Can Loan Origination Fees Affect Your Taxes?
Loan origination fees, categorized by the IRS as points, can be deductible as home mortgage interest. This can be the case even if the seller pays them. Borrowers who can deduct all of the interest on their mortgage may even be able to deduct all of the points, or loan origination fees, paid on their mortgage.
To claim this deduction, borrowers must meet certain conditions laid out by the IRS. They’ll then need to itemize deductions on Schedule A (Form 1040), Itemized Deductions.
Loan origination fees are important to consider when shopping for a loan during the home-buying process. These fees are charged by lenders to help cover their costs of processing and closing a new loan application. While many lenders do charge origination fees, not all do, and some may be willing to negotiate.
Origination fees are just one reason it’s important to take the time to shop around and compare home loans. With a SoFi Home Loan, for instance, qualified first-time homebuyers can make a down payment as low as 3%.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.