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A mortgage origination fee is any fee that adds to the profit a lender can make on a loan.
Mortgage lenders are going to charge fees one way or another; that's why it's important to shop for a loan from more than one mortgage provider. But it's a bit of a shell game: Are the fees included in the interest rate, as an extra charge over on the fee sheet — or both?
And it’s not as simple as being just on the lookout for something called an “origination fee.” There are dozens of names for these bolted-on costs that can show up in your Loan Estimate as part of the loan’s closing costs.
How mortgage lenders make money
A loan's interest rate already comes with some built-in markup for the lender. To help make their interest rates appear more competitive, some mortgage companies will charge additional lender fees instead of profiting only from the rate.
Casey Fleming, Mortgage advisor
It’s one way of framing the [loan] product to make it appear more attractive than it is.”
"It's one way of framing the [loan] product to make it appear more attractive than it is," says Casey Fleming, a mortgage advisor who works in Silicon Valley.
When comparison shopping lenders, the key is identifying the fees that are valid, perhaps even negotiable, and the fees that are tacked onto a loan to pump up a lender’s profit.
How to spot junk fees
You can find these fees by reviewing the Loan Estimate that lenders are legally bound to provide you after applying for a loan. It’s just three pages long, but the section we’ll focus on is on the left-hand side of page two.
Look for anything that’s listed in Section A, Origination Charges, of the Loan Estimate beyond the discount points you can buy to lower your interest rate. This is where we’ll find the “junk” fees — the add-ons a lender uses to make more money.
"Those are the fees like origination fee, administration fee, underwriting fee, processing fee, document preparation fee, appraisal review fee — all of these kinds of fees," says Carolyn Warren, a mortgage broker in Kirkland, Washington. "Some lenders like to split out their fees into three or four categories so that no one fee looks very high."
Warren says lenders think that keeping fees under $1,000 may seem palatable enough that borrowers won't object to them, especially when they appear legitimate.
But that doesn’t mean the fees can’t be scrutinized or that you, as a borrower, should feel uncomfortable about asking to have them removed.
All 'origination charges' are negotiable
Remember, any fee in Section A “Origination Charges” is negotiable and part of the lender’s profit strategy. And the larger the loan you're seeking, the more leverage you have to haggle fees — origination, junk or otherwise.
You can even start negotiations before you get an official Loan Estimate. To do that, ask each lender you’re considering: "If we proceed, what are all of the ‘origination charges’ that I will find listed on the Loan Estimate under Loan Costs, Item A?" Use those exact words and get their response in writing.
"When enough people reject overpriced loans and junk fees, then they'll go away,” Warren says. “As long as they can get away with it, [lenders are] going to do it."