An origination fee is an upfront charge to the borrower for issuing a loan or mortgage.
Points are also upfront charges paid by the borrower for issuing loans. A point represents 1% of the loan amount. Since origination fees are also expressed as a percentage of the loan amount, the terms are relatively synonymous in practice.
Why Charge Origination Fees?
Origination fees are charged by lenders and originators for two reasons. First, origination fees allow loan originators to recover upfront costs associated with a loan. Origination fees also allow originators to make more upfront profit on issuing the loan.
Second, origination fees allow buyers and lenders to trade off interest over the life of the loan for monies paid at the beginning of the loan. Lenders may lower the interest rate in exchange for payment of fees upfront.