Origination Points

Origination Points

What are the points of origin?

Origin is a step-by-step process that every borrower must follow to obtain a mortgage or home loan. Meanwhile, the points of origin represent the fees that borrowers pay to lenders or loan officers to offset the valuation, processing and approval of mortgage loans. They represent a means of paying closing costs and these costs are negotiable between lenders.

Unlike other types of points (for example, discount points), origin points are not tax deductible.

Key points to remember

  • There are two types of points in a mortgage: discount and origination.
  • Points of origin are fees paid for the evaluation, processing and approval of mortgages.
  • The more reduction points paid, the lower the interest rate on the mortgage.
  • One point is generally equal to 1% of the amount of the mortgage.
  • Unlike some other mortgage costs, points of origin are not tax deductible.
  • It can be beneficial to research and ask questions, as the number of points of origin can vary from one lender to another.

Discount vs points of origin

There are two types of points: discount points and origin points. The discount points represent the interest paid in advance on the loan and these are tax deductible. The interest rate will be lower depending on the number of points a borrower pays, because the more points paid, the lower the interest rate. Depending on how much a borrower wants to lower his interest rate, he can pay from zero to four points.

While the discount points represent prepaid interest, the origins are the costs that the borrower must pay the lender to extend the loan. The cost of points is tax deductible if used for the mortgage and not for closing costs. According to the IRS, if the fees are for items that appear on a settlement statement, such as inspection or notary fees, the cost is not tax deductible.

The points of origin vary from one lender to another and a single point of origin represents 1% of the mortgage. For example, if a person borrows $ 150,000 and the bank charges the 1.5 points of origin, they will pay $ 2,250 (or 1.5% of $ 150,000) in points of origin. The fees charged by banks to create the loan are generally 1 point of origin, or 1% of the amount borrowed.

Example of points to reduce payment

Whether or not a borrower must pay discount points depends on factors such as how much he has to deposit as a closing deposit and how long the borrower intends to stay in the house. . If discount points are paid to lower the interest rate, it is an advantage if the borrower plans to stay in the house for a long time since the mortgage payments will be lower. However, in many cases it is better to pay zero points and use the money for furniture or other investments instead.

Take an example using a 30 year fixed rate mortgage (FRM) from a hypothetical lender (lender X). This specific example is courtesy of the US mortgage calculator’s website and shows an example of how paying for discount points lowers the interest rate. He assumes that the rate for a 30-year FRM is 4.125%.

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 point of discount (or $ 4,572) or to 4% by paying 0.461 point ($ 1,383) to the lender. Paying more points will reduce the monthly mortgage payments and possibly increase the possibility of having the loan approved.

With regard to points of origin, borrowers should search for lenders and inquire about closing costs, as they might be able to negotiate the amount paid. Obviously, a borrower wants to minimize fees, closing costs and origins on the mortgage.

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