Buying a home comes with a fair amount of introspection and budgeting – as well as industry jargon. These can prove difficult to navigate for the first-time homeowner and seasoned veteran alike. Knowing the difference between different types of financing options can help homeowners determine and secure the best interest rate for their mortgage.
Mortgage Points and Origination Fees are two of the terms which affect the interest rate of a mortgage, but in different ways. Lenders use these two terms at closing, but it’s essential to understand the difference before signing on the dotted line – or two, or three. Here’s what you need to know about mortgage points, origination fees, and your Bellevue mortgage.
What Are Discount Points?
Discount points, in their simplest form, are fees that give you an opportunity to lower your interest rate, which also lowers your monthly mortgage payment. In this sense, discount points serve as prepaid interest on your mortgage. The more you pay in discount points, the lower your interest rate will ultimately be. Purchasing payment points may also be called “buying down” your interest rate. Therefore, a loan with no points will generally carry a higher interest rate than a loan with even one discount point.
The amount that you can pay down will vary from zero to many points, depending on the lender and your financial situation. Each Washington mortgage lender has a unique pricing structure, which means your mortgage rate will vary based on the points you pay and what each point is worth. Your interest will also depend on the type of loan you’re seeking and the current state of the mortgage market.
In general, each discount point you buy lowers your interest rate one-eighth to one-quarter of a percent. By purchasing discount points, you have an opportunity to make a significant difference on your monthly payments.
How Much Do Discount Points Cost?
Discount points have a set cost of 1% of your mortgage amount. For example, if you’re looking to purchase a $200,000 home, one discount point would cost $2,000. Paying this one-time fee of $2,000 could take your interest rate from 4% to 3.75%.
Mortgage lenders compare purchasing mortgage points to buying a car. You can get an auto loan with zero down, but expect your payments to be higher each month than if you put $999 or even $400 down.
Since discount points vary by lender, it’s important to examine the fine print before making any purchasing decisions. The worth of a mortgage point varies daily based on the climate of the mortgage market, and sometimes the amount charged to lower an interest rate does not provide a significant benefit. However, discount points are tax-deductible, which may prove advantageous at the end of the tax year.
What Are Origination Fees or Points?
Loan origination fees or points cover the mortgage company’s costs in processing the loans. They serve to pay closing costs, and the rate of payment is negotiable. The number of origination points a company charges varies from lender to lender, so it’s an important question to ask when shopping around for the top mortgage company.
Several factors may play a role in the amount of origination points you’ll have to pay. One of the most important is credit history. A mortgagor with a positive credit history is likely to pay less in origination fees than one with a short credit history or blemished record.
Like discount points, the cost of a single mortgage point is 1% of the mortgage loan. As such, if a mortgage company is charging 2 origination points on a 200,000 loan, you can expect to pay $4,000 in loan origination fees.
Since origination points apply to fees paid at closing, they are not tax deductible. However, you may have more negotiating room on the number of points they expect you to pay. Searching for a lender that charges a lower number of origination points can be one way to save on the cost of your loan.
Keep in mind that lenders may use industry terms interchangeably. Some companies may refer to origination fees as loan discounts or simply origination points. Your Seattle mortgage company can help you understand the terminology and make the best decision for your loan.
When Are Points Worth It?
Generally, the decision to pay mortgage points, whether discount points or origination points, depends on the following factors:
- How long you plan to stay in your home
- How much money you have set aside for closing
If you consider this home purchase a “starter,” or plan to refinance your home within a few years, it might not make sense to purchase points. Discount points represent a modest savings each year, and it could take several years to recoup your initial investment. The longer you intend to stay in your home, the better idea it is to buy down your interest rate.
Origination fees, on the other hand will depend on the amount of money you have available to spend at closing. If you need your closing costs to remain low, opt for the zero point option on your loan. Keep in mind, however, that this may affect your interest rate.
The Final Word on Origination and Discount Points
Origination fees and discount fees have their advantages, but they will vary based on the individual. If you’re considering “buying down” your interest rate or negotiating your origination fees, keep these pointers in mind. Knowing the difference between the two and how they affect your mortgage rate is important when shopping for lenders, and for understanding how they may affect your monthly payment.
As a Washington mortgage company, Sammamish Mortgage can help you understand your options as they pertain to discount points and origination fees. Let us help you get into the home of your dreams at the best price possible. Contact us to learn more about our loan programs or use our free mortgage calculator to determine the approximate cost of getting into your home.