What are Home Mortgage Points? Origination Points vs. Discount Points

After you have been pre-approved for a mortgage to buy your new home, you may hear something about“points.”

This simply means you have the opportunity to pay to decrease your mortgage payments and/or save money on interest.

A point is equivalent to one percent of your total mortgage. For example, if your loan is $100,000, one point would be $1,000 or one percent of the loan amount.

The primary types of points are (a) origination points or (b) discount points.

Origination points

When a mortgage broker processes your loan, you and the lender are required to pay for his or her service. This payment is called an origination fee, which is a percentage of total mortgage loan.

Beware that mortgage brokers can decide on their fee amounts, and some will charge you excessive amounts. If you’re not paying attention, don’t know better and don’t have a good buyer’s agent or real estate attorney representing you, you may not know you’re paying too much.

If you are being charged two (2) points on a $200,000 loan, it means you will pay $4,000 (2% of $200,000) when you are closing your loan. While that may not seem ridiculous, it’s best to do some careful to research to find out if the broker also is not getting a Yield Spread Premium or back-end points, too.

Mortgage brokers do this by adding a prepayment penalty to your loan, which means if you pay the loan off early, the lender or bank penalizes you by adding on a higher interest rate to cover their brokerage fees.

Although the closing agent will discuss these fees with you at the closing and it will be included in your paperwork, you may miss the significance of them if you don’t understand what they mean to you.

Here’s how it works:

A broker could offer you an interest rate of 5 percent and not get anything from the lender. The broker may also offer a 5.4 percent interest rate and get one percent of the total amount of the mortgage from the bank or lender. Another possibility is the mortgage broker could offer you an even higher interest rate and get three percent back from the lender.

Be sure you ask the broker the amount of his or her total commission. That way, you will be fully aware of what your costs will be and be able to negotiate, decreasing your costs and lowering your interest rate to save thousands in the long run.

Discount points

These points are paid at the closing table and will help you get a better interest rate for the duration of your mortgage.

If you plan to stay in your new home and keep your loan for a long time, say 15 or 20 years, paying discount makes may good a route to take.

Your lender may offer you the opportunity to pay one percent of the loan (one point) to decrease your interest rate by an eighth of one percent. But this option would not make as much sense if you know you are going to refinance or sell your home in a short period of time.

The best way to decide if buying discount points is a good option for you is to determine your break-even point. The general rule of thumb is the longer you plan to be in your home, the chances are better that this may be beneficial for you. So crunch the numbers.

For instance, if your loan will be $200,000 and your interest rate is 5.000%, your loan payment, including principal and interest would be $1,073. But if you purchased one discount point, your interest rate would drop to 4.875% and your monthly payment would then decrease to $1,058. Then you would save $15 a month…in exchange for paying and additional point (one percent of the loan for $2,000 in this example) at closing.

It would cost you $2,000 for that one discount point at the closing. With the $15 a month savings, you would break even in 11 years. Since most families remain in their homes for less than a decade, in this case buying discount points probably would not be a good decision. But it could be a solid choice if you know you’ll say in your home longer.

Call Conquest Real Estate Group for More Info: (248) 569-1486