Understanding the origination fee on a mortgage

Anyone buying a home will be interested in knowing just how much they'll have to pay toward a mortgage each month. But reviewing the mortgage documents will introduce you to a host of other charges involved in the transaction.

One fee is meant to cover the costs involved in preparing the mortgage. The origination fee is a fairly simple concept, and can sometimes be lowered to help reduce your up-front costs.

Each new loan will require a considerable amount of work to start up. Fraser A. Sherman, writing for SFGate, says these tasks include assessing a borrower's credit risk, verifying their income and other pertinent information, and determining the maximum loan amount the lender will approve.

The costs for these services are sometimes charged separately, but can also be rolled together into a single fee. Margaret Heidenry, writing for the National Association of Realtors, says the origination fee may include closing costs such as underwriting fees or administrative fees.

Origination fees are generally charged as a percentage of the total loan. The financial site Investopedia says they are generally between 0.5 percent and 1 percent of the mortgage principal. A loan of $300,000 would typically require you to pay $1,500 to $3,000 at closing as an origination fee.

This charge is often referred to in terms of points. In real estate lingo, a point is equal to 1 percent of the loan amount. The real estate site Zillow says the mortgage documents should indicate whether you are being charged any points on top of the origination fees, since paying points at closing can reduce your interest rate.

It is often possible to negotiate the cost of the origination fee to save you some money at closing. Heidenry says lenders are more willing to lower this cost if you have a higher income and a good credit score.

This type of borrower is also more likely to take out a larger mortgage, which may affect the percentage of the origination fee. Investopedia says the balance of the mortgage does not typically affect how long it takes to process a loan application, but the lender will naturally get a smaller fee for larger mortgages. An origination fee of 1 percent will charge $7,500 for a $750,000 mortgage, but the same rate will bring in only $750 for a $75,000 loan.

For this reason, a lender might adjust their origination fees for loans that are considered particularly large or small. They may be more willing to negotiate a lower origination fee for a larger loans, but also more likely to charge a larger percentage for a small loan.

Your real estate agent may be able to reduce some itemized charges in the origination fee. Sherman says some extra fees essentially serve as padding, and an agent may be able to identify them.

Check with a few different lenders before choosing one. Heidenry says you may be able to find an origination fee charged at a more advantageous rate or a lender that offers a credit which will offset the cost of the fee. Some banks may not even charge an origination fee for their services. Be sure to take all factors into consideration, such as the interest rate you'll pay over the life of the loan.

Be careful about reducing the cost of the origination fee for greater costs elsewhere. Negative points will give you a credit to knock down your closing costs, but only in exchange for a slightly higher interest rate. Investopedia says you'll save more money over time with a lower interest rate, so you should only increase it to lower your origination fee if you plan to move or refinance your loan within a few years.