How do points affect my mortgage decision?
Points are one type of fee paid at closing by you to your mortgage lender. There are two types of points: Origination Points and Discount Points. Each point equals 1% of your loan amount. For example, 1 point on a $100,000 loan would cost $1,000.
What is the difference between Origination Points and Discount Points?
They differ in where they are applied. Origination points are charged to recover some costs of the loan origination process. Typically, your Loan Officer’s compensation is based on the Origination point(s). Depending on the lending institution, the Origination Point(s) may be negotiable in whole or in part.
Discount Points are used to “buy” your interest rate lower. This is known as a rate “buy-down.” A general rule of thumb is that one full Discount Point will lower your fixed interest rate .250% or your adjustable rate .375%. These points lower the interest rate for the entire term of the loan. There is usually some flexibility by the lending institution in determining the actual buy-down formula, but less than with Origination Point(s).
Is there an advantage to paying one type over the other?
Actually, there may be, depending on your tax situation. There is no advantage to paying an Origination Point instead of a Discount Point. However, the Discount Point(s) that you pay may be tax deductible. Unfortunately, Origination Points are not usually tax deductible. The Discount Points are usually deducted under Schedule “A” of your IRS 1040 tax return. If you do not itemize your deductions (by taking the Standard Deduction) for other tax-related reasons, you may not be able to deduct the cost of the points when filing your tax returns. Please consult your tax advisor for details or visit Nazaire & Co..
Why do some lenders charge points but others don’t?
It is up to the individual lender whether or not they charge Origination Point(s). Almost every lender’s pricing includes different levels of Discount Points. They may offer options with no points, 1 point, 2 points and maybe even more. The more points that you are willing to pay, the lower the interest rate the lender will offer you. It is common for each option to include fractions of points (for example, 1.25 points).
Most lenders advertise their 0 point interest rates while others list their lowest possible rate with several points attached. When comparison shopping, make sure that you know all fees that are being charged. A lender offering 7.000% + 1 Discount point but 0 Origination Points may be a better deal than the lender offering the same rate with 0 Discount Points but 1.500 Origination Points. Both types of points are calculated using the same formula. Before making a final decision, look over all details of the offer, not just the interest rate. Please consult your tax advisor for details or visit Nazaire & Co..