What does an origination fee typically represent in a lending context?

An origination fee typically represents an upfront fee that is calculated as a percentage of the total loan amount. This fee is charged by the lender to cover the costs associated with processing the loan application, including underwriting and other administrative tasks. By being a percentage of the loan, it scales with the size of the loan, meaning larger loans will have correspondingly higher origination fees.

This fee is usually deducted from the loan amount or paid at closing, and it compensates the lender for the initial work involved in evaluating and setting up the loan. Understanding this fee is crucial for borrowers as it can impact the overall cost of borrowing and should be factored into the total expenses associated with securing a loan.