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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Origination Points
When you apply for a mortgage to buy a new home or refinance your current mortgage, your loan goes through multiple levels of the process before the loan is disbursed.
One of the most important processes in the mortgage is the origination and many lenders charge the borrowers for origination in the form of points. In this post, we will understand origination points in detail.
What Are Origination Points?
Origination is the process initiated by the mortgage broker or the mortgage lender where they will evaluate, process, and approve the borrower’s mortgage application.
The mortgage lender or the mortgage broker charges a fee for the entire process of origination is called origination points.
The origination points vary from lender to lender and are negotiable.
These points are charged in percentage. Usually, the mortgage originator or the mortgage lender will charge one percent as the origination point.
However, this charge is completely negotiable and could vary from 0.5% to 1.5% depending on the complexity of the loan processing.
What Is The Difference Between Discount Points And Origination Points?
Discussing points could be very confusing at times. However, borrowers need to know what they are paying for. There are two types of points when you apply for a mortgage or a refinance.
Discount points are charges that are paid by the borrower to buy down the interest rate.
In other words, borrowers pay extra upfront through the closing costs as discount points to get a lower interest rate so that their monthly mortgage payments could be lower.
One discount point equals one percent of the loan amount. For example, if your loan amount is $200,000, one discount point would be $2,000. The Discount points are tax-deductible.
On the other hand, the origination points are the fees paid by the borrower to the lender to process the loan which includes evaluation of credit, document processing, underwriting, and closing.
These fees are also charged by the percentage where one point equals one percent of the loan amount.
For example, if your loan amount is $150,000 and the lender is charging you 0.5% origination, you would end up paying $750.
However, you can always shop around with multiple lenders and mortgage brokers to check if this charge could be waived. Many lenders do not charge any loan origination.
These types of points are non-tax deductible.
Let us take a few examples where the borrower is getting a quote from a lender which includes both origination and discount point.
A lender is offering an interest rate of 5.625% on a 30-year mortgage for a loan amount of $400,000.
Here the lender is charging you zero discount points and 1 origination point. This means you are going to pay $4,000 in origination and zero for buying down your mortgage interest rate.
Another lender is offering an interest rate of 5.25% on a 30-year mortgage for a loan amount of $400,000.
Here the lender is charging you one point each in origination and discount. This means you are going to pay $4,000 in origination and $4,000 for buying down your mortgage interest rate.
More On Origination Points
Origination points are additional charges that are included in your closing cost. Your lender has other fees to process your loan like underwriting fee, processing fee, etc.
If your lender is charging you origination points on top of all the other fees, you might want to reconsider your option to work with that lender.
Hence it is suggested to at least take mortgage loan estimates from three different lenders and compare them to understand which lender is charging you fewer points in origination.
This way you can save thousands of dollars in your transaction which you can utilize for home improvements or any other investments.
Conclusion
In a nutshell, the origination point is charged by the lender to process your loan which you can negotiate.
Make sure that you shop around when you are planning to get a mortgage or refinance your existing one.
Be educated on the difference between origination and discount points as they have a different impact on your loan.
Knowing the difference between both can help you make a smart financial decision.
