Definition
A loan origination fee is an upfront fee charged by a lender for evaluating, underwriting, structuring, and funding a loan. It is typically expressed as a percentage of the total loan amount and paid at closing.
How It Is Calculated
Origination fees are commonly quoted in percentage terms:
- Formula: Loan Amount × Origination Fee %
- Typical range (commercial): 0.5% – 2.0%
- Higher-risk or bridge loans: May exceed 2%
Example
- Loan amount: $12,000,000
- Origination fee: 1.0%
- Fee paid at closing: $120,000
Why Lenders Charge It
- Underwriting costs: Credit review, property analysis, and due diligence.
- Administrative expenses: Legal documentation and processing.
- Revenue generation: Compensation for structuring and capital deployment.
- Risk pricing: Higher fees often reflect higher perceived risk.
Impact on Borrowers
- Increases total financing cost: Reduces net loan proceeds.
- Affects effective interest rate: Raises the loan’s all-in cost.
- Should be capitalized in underwriting: Modeled as transaction cost.
- Impacts IRR: Particularly relevant in short hold periods.
Origination Fee vs. Points
The term “points†is often used interchangeably with origination fee. One point equals 1% of the loan amount.
Investor Considerations
- Compare lenders on all-in cost, not just rate.
- Short-term loans magnify fee impact.
- Negotiation leverage: Fees may vary by deal size and sponsor strength.
- Refinance modeling: Account for new origination fees in future debt assumptions.
Common Pitfalls
- Ignoring effective yield: Fees increase real borrowing cost.
- Overlooking broker compensation: Some deals include additional placement fees.
- Underestimating short-term impact: Fees matter more on bridge debt.
- Failing to negotiate: Larger or repeat borrowers may secure lower fees.