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Understanding Origination Fee and Points in Mortgage Process

Understanding Origination Fee and Points in Mortgage Process

The concepts of origination points and fees are quite often confused with one another. The Buzzle article will help you understand the difference between origination fee and points in a mortgage process.
Buzzle Staff
Did You Know?
The annual Mortgage Closing Cost Survey conducted by the website Bankrate, states that, on an average, to get a mortgage, applicants are paying 6 percent more in 2014 as compared to 2013.
A mortgage means a security that is given to the creditor by the borrower. When you agree to a mortgage, you're signing a legal contract promising to repay the loan plus interest and other costs. If this debt is not repaid on time, the lender can legally take back the property from you and sell it off so that he can recover his debt. This process is referred to as foreclosure. Besides these, there are several other financial terms in a mortgage process.

Origination charges and points are two terms that often confuse people. The origination fee vs. points comparison given below will try to explain these two terms.

Origination Fee
  • It is an amount that is paid to the lender or the organization handling your mortgage while originating your loan process.
  • It varies from lender to lender and is expressed in points.

Points
  • It is just 1% of the total mortgage amount.
  • If the amount is USD 200,000, then your point will be one percent of that, which is USD 2,000.
  • There are two major types of points:
    1. Origination Point: It is a non-deductible fee paid to the lender. It is a compensation to the financial institution for processing and approving your mortgage.
    2. Discount Point: It is a portion of interest on your mortgage that is actually paid at closing time. Since you will be paying this portion in advance, you'll need to pay a lower interest rate on your mortgage. Doing so will reduce the overall amount of your mortgage.

The Comparison Chart

Origination Fee Points
It is generally not tax deductible. They are tax deductible.
It usually varies from 0.5% (half a point) to 2% (two points) of a given loan amount, depending on whether the loan was originated. They are used to lower the interest rates, temporarily or permanently.
If at all, it is accepted as a tax deduction, it needs to be expressed as a percentage of the loan amount, like a point. They are tax deductible, because they are a form of interest.

Things to Keep in Mind
  • On a very basic level, both terms are essentially the same; they are just used interchangeably.
  • The origination charge is expressed in 'points', and so, when the broker charges a 'point' as a 'fee', the terms overlap.
  • Choosing a 'no point' loan is not really a financially sound choice, since you will probably pay a higher interest rate, much more than the loan.
  • Before you pay points or discounts, see to it that the interest rate is actually lowered.
  • The fee that you pay is just the broker fee, something that is paid for the service rendered to you, nothing else. Ideally, no deductions or appraisals can be applied to it.
  • Since the fee is a commission-based payment, it is likely that the fee rate would be negotiated lower for bigger loans in order to obtain the valuable business.
  • Paying discount points have been generally observed to reduce a home buyer's mortgage interest rate by 1%, but that does not mean you have to do so, it depends on several factors.
  • Generally, each discount point purchased at closing will reduce the interest rate on your mortgage by 0.25%.
As mentioned earlier, your origination fee is just an amount that goes into someone's pocket, while it is expressed in points when you have to negotiate interest rates. Whether you desire less or more points depends entirely on your financial situation. Quite often, when you get a mortgage, there will be multiple options with different origination fees. If the situation is such that, in the long run you would need to pay considerably less to the bank and reduce mortgage payments, take the maximum number of points offered. For other situations, it may make sense not to pay any points at all. You have to sit and calculate the numbers before you take the plunge.
Disclaimer: This article is for reference purposes only and does not directly recommend any specific financial course of action.