Understanding Discount and Origination Points
March 13th, 2013
March 13th, 2013
If you’re buying a home or refinancing, you’ll often hear the term “points” mentioned. So, what is a point?
A point is a percentage of your mortgage loan that is paid upfront as a finance charge before you close on your mortgage loan. Your lender may charge you one or more points on your mortgage loan. A point equals 1 percent of the total amount of your mortgage loan. For example, let’s say you’re getting a mortgage loan for $225,000. One point would be $2,250 ($225,000 x 0.01).
Two types of points are discount and origination.
A discount point actually allows you to buy down the interest rate on your mortgage by prepaying a percentage of the interest on the loan at closing. So the more points you pay, the lower the interest rate will be on your loan. Which means your monthly mortgages will be lower. You can pay from no points to up to 3 or 4 points. It’s your choice.
However, paying for discount points upfront only makes sense if you’re planning to continue paying on your loan for many years – at least 7 years on a 30-year mortgage. If you think you may refinance or sell your home within a few years, pre-paying discount points is not a good choice for you. Therefore, if you’re considering pre-paying discount points, talk to your lender or broker to determine your break-even point first. Just know that, typically, a lot of people face a life change situation (i.e., job change, divorce, college tuition costs) every 7 to 10 years that requires them to refinance or sell their home.
Discount points may be tax-deductible if you itemize your tax return. However, because points are pre-paid interest, you can’t take the entire deduction in the next tax year. You have to amortize the points over the term of your loan. Talk with your tax adviser to find out if you qualify for this deduction. For more information, refer to the IRS Publication 936, Home Mortgage Interest Deduction.
An origination point is a fee charged by the lender to recover some costs for evaluating, processing and approving your mortgage application. These points basically cover the cost of doing business with your lender. It’s up to the lender whether they charge an origination fee or not. Plus, this fee can vary depending upon the lender. Also, generally, origination points are not tax deductible.
Every lender will provide you with a good faith estimate before you close your loan. Refer this estimate carefully. It will contain information about points applied to your loan. If you don’t understand the estimate or you notice you’re being charged for points you weren’t expecting, talk to the lender before you close on your loan. You may be able to negotiate with your lender to reduce your costs.
Also know that the majority (98%) of our loans are “lender paid,” which means the lender pays us directly for our services. So, Grandview Lending doesn’t add origination points or fees to your loan. By law, a mortgage broker can’t be paid by the lender and the borrower for the same transaction. So, you’ll never be steered into a higher commissioned transaction. (Note: A bank can be paid on both sides of the transaction, which is often not disclosed to the borrower.)
How does being lender paid help you? Since we can’t get paid for the difference in the interest rate that’s given to you (like a bank is able to do), the extra “yield spread premium,” or lender credit, must be given to you – which can help you offset your closing costs.
We provide our clients with exceptional service and integrity which has become our hallmark.