What Are Origination Points?
Let me walk you through what origination points really mean in the mortgage world. Origination is the step-by-step process you have to complete as a borrower to get a mortgage or home loan. Origination points are the fees you pay to lenders or loan officers to cover the work of evaluating, processing, and approving your loan. Think of them as a way to handle closing costs, and remember, these fees are something you can negotiate with different lenders.
Unlike other points like discount or mortgage points, origination points aren't tax-deductible. That's a key difference you need to know.
Key Takeaways
- There are two types of points in a mortgage: discount and origination.
- Origination points are fees paid for evaluating, processing, and approving mortgage loans.
- The more discount points paid, the lower the interest rate on the mortgage.
- One point is typically equal to 1% of the mortgage amount.
- Unlike some other mortgage fees, origination points are not tax-deductible.
Discount vs. Origination Points
You should understand the two main types of points: discount points and origination points. Discount points are basically prepaid interest on your loan, and they're tax-deductible. The more points you pay, the lower your interest rate gets. You can choose to pay anywhere from zero to four points, depending on how much you want to cut that rate.
On the other hand, origination points cover the costs you pay the lender to actually issue the loan. These might be tax-deductible if they're specifically for the mortgage itself, but not if they're tied to closing costs like inspections or notary fees, according to IRS rules.
Origination points differ from lender to lender, and each point equals 1% of your mortgage loan. For instance, if you're borrowing $150,000 and the lender charges 1.5 origination points, you're looking at $2,250—or 1.5% of that amount. Banks usually charge about 1 origination point, which is 1% of what you're borrowing.
Example of Discount Points to Reduce Payment
Deciding whether to pay discount points depends on things like how much you can put down at closing and how long you plan to stay in the home. If you pay them to lower your interest rate, it's beneficial if you're staying put for a while, since your monthly payments drop. But often, it's smarter to skip the points and use that money for home furnishings or other investments.
Here's a hypothetical example with a 30-year fixed-rate mortgage from a made-up lender, Lender X, assuming a base rate of 4.125%. I'll show you how paying discount points affects the rate.
Example Mortgage Rates and Points
- Rate: 3.875%, Points: 1.524, APR: 4.075%
- Rate: 4.000%, Points: 0.461, APR: 4.111%
- Rate: 4.125%, Points: 0.000, APR: 4.197%
Continuing the Example
If you're borrowing $300,000, you could drop the rate to 3.875% by paying 1.524 discount points, which is $4,572, or to 4% by paying 0.461 points, that's $1,383. Paying more points cuts your monthly payments and might even help get the loan approved.
For origination points, do your homework on lenders and ask about closing costs—you can often negotiate them down. You want to keep fees, closing costs, and origination points as low as possible on your mortgage.
How Do Origination Points Differ From Discount Points?
Discount points are upfront payments that buy down your mortgage interest rate, reducing monthly payments. Origination points cover the lender's overhead for the loan. Both are paid at closing, but discount points can be tax-deductible while origination points are not.
How Much Are Origination Points Usually?
On residential mortgages, origination points usually range from 0.50% to 1.50%, with 1.00% as the average.
How Can I Avoid Paying Origination Points?
Not every lender charges origination points, so shop around if that's a priority for you. You might negotiate lower points with your lender, or ask the seller or a broker to cover them.
The Bottom Line
Origination fees might look like just another closing cost, but they pay the lender for preparing paperwork, verifying details, and approving your loan. You can negotiate these points, and you'll have more leverage if multiple lenders are vying for your business.
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