What is the primary purpose of an origination fee?

The primary purpose of an origination fee is to cover the lender's overhead and costs incurred in making a loan. This fee is charged at the beginning of a loan process and is typically calculated as a percentage of the loan amount. It helps the lender recover expenses related to processing the loan, including costs for underwriting, processing documentation, and other administrative tasks necessary to evaluate and approve the loan application.

Understanding the origination fee is important for borrowers as it impacts the overall cost of acquiring a mortgage. It is a critical component of the loan terms and helps lenders maintain their operational capabilities while providing financing to borrowers. Other fees associated with loans, such as appraisal costs or reserve allocations, serve different specific purposes and do not encompass the broader overhead costs that the origination fee addresses.