A fee charged by a lender for processing your loan application. Similar to a broker’s commission, an origination fee is the Lender’s way of getting paid for its services. Origination fees range from 0.5% to 1.00%, and are often negotiated with the terms of the loan. In situations where a borrower desires a lower origination fee, the lender may demand an increase in the interest rate. Origination fees usually represent a higher percentage of smaller loans, as the lender is looking to make their time spent worthwhile.
For example, say you are negotiating a loan for $500,000 from the bank. The bank has established an origination fee of 0.50% for its services, which would equate to a $2,500 upfront payment. In the scenario that you request a loan for $250,000, the lender may increase the fee upwards of 1.00%, as processing either loan requires the same amount of time and effort for the lender.
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