What does a loan origination fee typically represent?

A loan origination fee is typically a percentage of the total loan amount charged by lenders as a part of the costs associated with processing the loan. This fee is meant to cover the lender’s costs for evaluating, preparing, and approving the loan application. The percentage structure aligns with the overall loan amount, which means that larger loans will incur higher origination fees compared to smaller loans.

In this context, while a flat fee could apply in some scenarios, it is more common for lenders to base origination fees on a percentage to reflect the administration and origination effort that scales with the size of the loan. This fee is distinct from closing costs, which can encompass a variety of other fees and expenses associated with finalizing the mortgage. Additionally, origination fees are not typically refundable once they are paid, making that choice incorrect in this situation.