Everything You Always Wanted to Know About Loan Origination Costs

Loan origination costs are fees charged to reimburse the lender for origination activities, reduce the nominal interest rate, or other charges directly rated to making the loan. According to GAAP, any difference in the initial amount paid at the date the loan was acquired and the principal amount should be deferred and recognized over the life of the loan and amortized accordingly. Now depending on the type of the loan the costs should either be amortized using the effective interest rate method or the straight-line method. It basically all comes down to the type and terms of the loan. The effective interest rate method is used to show a constant effective yield over the life of the loan, whereas with the straight-line method the costs are amortized equally over the life of the loan, applying the same amount in the beginning and the ending of the loan term. In only certain situations when there are no set payments and/or the principle is not defined is the straight-line method acceptable. 

 For further information on this topic see FASB codification 310-20-35