Origination is a step-by-step process that every borrower must complete to obtain a mortgage or home loan. Origination points are the fees that borrowers pay to lenders or loan officers to compensate for evaluating, processing, and approving mortgage loans. These fees can be a way to cover closing costs, and they are negotiable among lenders.
Unlike other types of points—such as discount points—origination points are not tax-deductible.
Key Takeaways
- There are two main types of points in a mortgage: discount and origination.
- Origination points are fees paid for the evaluation, processing, and approval of mortgage loans.
- The more discount points you pay, the lower your mortgage interest rate will be.
- One point typically equals 1% of the mortgage amount.
- Unlike discount points, origination points are not tax-deductible.
- It’s beneficial to research and ask questions because the number of origination points can vary among different lenders.
Understanding Discount vs. Origination Points
There are two types of points associated with mortgages: discount points and origination points. Discount points represent interest that is prepaid on the loan and are tax-deductible. The interest rate decreases as the number of discount points paid increases. Depending on how much a borrower wants to reduce their interest rate, they can pay from zero to four points.
While discount points are essentially prepaid interest, origination points cover the costs the borrower must pay the lender for extending the loan. The cost of these points is not tax-deductible if they apply to items that appear on a settlement statement, such as inspection or notary fees.
Origination points can vary from lender to lender. A single origination point represents 1% of the mortgage loan. For example, if an individual is borrowing $150,000 and the bank charges 1.5 origination points, they will pay $2,250 (or 1.5% of $150,000) in origination points. Origination fees typically amount to 1 origination point or 1% of the borrowed amount.
Example of Discount Points to Reduce Payment
Whether a borrower should pay discount points depends on their intended duration in the home and available funds at closing. Paying discount points to lower the interest rate can be advantageous if the borrower plans to stay in the house for a long time because it leads to lower mortgage payments. In some cases, it may be better to pay zero points and use the money for other purposes such as home furnishings or other investments.
Consider a hypothetical example using a 30-year fixed-rate mortgage from a hypothetical lender (Lender X) to demonstrate how paying discount points can lower the interest rate. Assume the rate for a 30-year FRM is 4.125%.
| Example Mortgage Rates and Points | ||
|---|---|---|
| Rate | Points | APR |
| 3.875% | 1.524 | 4.075% |
| 4.000% | 0.461 | 4.111% |
| 4.125% | 0.000 | 4.197% |
If an individual borrows $300,000 for a new home, the interest rate can be reduced to 3.875% by paying 1.524 discount points (i.e., $4,572) or to 4% by paying 0.461 points ($1,383) to the lender. Paying more points will reduce monthly mortgage payments and possibly increase the likelihood of loan approval.
Regarding origination points, borrowers should research lenders and inquire about closing costs because they might be able to negotiate the amount paid. Borrowers should always aim to minimize fees, closing costs, and origination points on the mortgage loan.
How Do Origination Points Differ from Discount Points?
Discount points are upfront payments that “buy down” the interest rate on a mortgage, lowering its monthly payments. Origination points cover overhead costs for the loan. Both types of points are paid at closing, but discount points may be tax-deductible whereas origination points are not.
How Much Are Origination Points Usually?
Origination points on residential mortgages typically range from 0.50% to 1.50%, with 1.00% being the industry average.
How Can I Avoid Paying Origination Points?
Not all lenders charge origination points, so it pays to shop around if this is a concern. You might be able to negotiate lower points with your lender to close the deal or request that the seller or one of the brokers involved in the transaction pay them on your behalf.
Related Terms: mortgage, home loan, interest rate, closing costs, discount points.
References
- Internal Revenue Service. “Topic No. 504 Home Mortgage Points”.
- Consumer Financial Protection Bureau. “What Are (Discount) Points and Lender Credits and How Do They Work?”
