Loan Origination & Discount Points
Understand the costs associated with paying mortgage origination and discount points
As the mortgage process winds down, you'll start to see paperwork that documents all the closing costs you'll be responsible for paying, including processing fees, appraisal fees and more. If you elected to pay discount points in order to secure a lower interest rate on your mortgage, it will be listed here. You may also find something called loan origination points. It's not uncommon for borrowers to be unfamiliar with that term, so here's a quick breakdown of what this refers to.
Loan origination points
From verifying documentation, evaluating your application and approving the loan, the loan processor does a lot of work on your application to make sure it goes through smoothly and gets approved. In other words, he or she originates the loan. The lending institution recovers some of the costs of this work through what's known as loan or mortgage origination points.
The lending institution will determine how much you'll pay in mortgage origination points by evaluating your credit, mortgage application, loan amount and other factors. A point is one percent of the loan, so if your lender charges you two loan origination points, you'll be paying two percent of the total loan amount. Depending on how much the lender's compensation is based on points, you may be able to negotiate loan origination points during the mortgage process. Also, note that loan origination points are not usually tax deductible.
Discount points aren't related to your loan process or lending institution. Rather, when you pay discount points, you're trying to lower your interest rate. When you hear someone say they 'paid points' on their mortgage to reduce the rate, this is what they're referring to.
The value of discount points can change between lending institutions and according to market conditions, but general practice is that one discount point can reduce the interest on your fixed rate mortgage by a quarter of a percent or up to a third of a percent on an adjustable rate mortgage. Unlike loan origination points, discount points are tax-deductible.
Depending on the type of home loan you have, you may be required to pay discount points. Some loans feature no points to attract borrowers. When evaluating loans, be sure you understand if and how many points are required so you have an accurate picture of how much it will really cost.
Apply for a mortgage with Citizens Bank
At Citizens Bank, we can work with you on finding a mortgage that fits your needs. Discount points aren't a required part of mortgage financing although you can inquire about paying them to lower your rate. You can start your mortgage application online or contact a home loan advisor at 1-888-514-2300 to get started.