When you’re in the market for a mortgage, the process can seem overwhelming. There are countless terms, options, and decisions to make, and one of the key decisions is whether to pay mortgage points. Mortgage points, often just referred to as “points,” can be a valuable tool for saving money on your home loan. In this article, we will delve into the world of mortgage points, explaining what discount points and origination points are, how they work, and when they might make sense for you.

Mortgage Points: A Brief Overview

Mortgage points are essentially fees you can pay upfront to reduce the interest rate on your mortgage loan. Each point typically costs 1% of the total loan amount. So, if you’re taking out a $300,000 mortgage, one point would cost you $3,000.

There are two main types of mortgage points: discount points and origination points. Each serves a different purpose and has its own set of benefits and considerations.

Discount Points:

Discount points, also known as “buydown points,” are prepaid interest on your mortgage. When you pay discount points, you’re essentially buying down your interest rate for the life of the loan. The amount of points that are required to buy down your rate can vary according to market conditions and the characteristics of your loan. Typically, you can buy down your rate in increments of 0.125%.

Here’s an example to illustrate how discount points work:

Let’s say you’re getting a 30-year fixed-rate mortgage for $300,000 with an interest rate of 6.875% as of 9/5/23. If you decide to pay two discount points at closing, it might lower your interest rate to 6.125%. In this case, you would pay an upfront fee of $6,000 (2 points at $3,000 each), but you’d enjoy a lower interest rate for the entire 30-year term of the loan.
The primary advantage of discount points is that they can result in significant long-term savings on interest payments. By paying a little more upfront, you’ll pay less over the life of your loan. This can be especially beneficial if you plan to stay in your home for many years and have no plans to refinance your mortgage in the near term. Using the example above, paying two points ($6,000) would decrease your payment by $123 per month. Over 5 years, this is savings of $7,380 (60 months X $123)
However, it’s crucial to consider how long it will take for the interest savings to outweigh the upfront cost of the points. If you plan to move or refinance soon, paying discount points may not be a wise financial decision. In the example above, the break-even on when your upfront cost ($6,000) will equal your monthly savings ($123) is forty-nine (49) months. If you refinance the rate on your mortgage or sell your property before the breakeven point, then you wasted your money.

Origination Points:

Origination points, on the other hand, are fees paid to your lender to cover the cost of processing your mortgage application and underwriting your loan. Unlike discount points, origination points do not lower your interest rate. Instead, they are a way of compensating the lender for their services.

Origination points are typically expressed as a percentage of the loan amount. The exact percentage can vary from one lender to another and may depend on your creditworthiness and the complexity of your loan application. It’s important to note that origination points are a one-time fee paid at closing.

For example, if your lender charges 1% in origination points on a $300,000 mortgage, you would pay $3,000 as part of your closing costs. This fee covers the administrative costs associated with processing and closing your loan.

While origination points don’t directly reduce your interest rate, they can indirectly impact your mortgage. For Lakeside Bank, we charge 1% origination points for our portfolio loan. This sounds expensive, but our portfolio loan is a great option if you have a property, credit or income that does not fit a conventional or jumbo loan. Compared not qualifying for a loan at all, the portfolio loan can be a great option.

When to Consider Discount Points:

Discount points can be a wise choice in certain situations:

However, it’s essential to calculate the break-even point to determine how long it will take for your interest savings to cover the cost of the points. If you’re uncertain about your future plans or have limited funds available for closing costs, it may be better to forgo discount points. You should speak to your Lakeside Bank mortgage loan consultant to discuss your options.

When to Consider Origination Points

Origination points are a standard part of many mortgage transactions, but there are a few things to keep in mind:

1. Unique Products: Make sure that you are getting value for paying origination points. It is unusual to pay large origination fees for standard conventional, FHA, VA and jumbo loan products. If you are going to pay origination points, make sure that the mortgage has some unique characteristics that you really need for your home purchase.
2. Tax Deduction: Depending on your specific financial situation, you may be able to deduct origination points on your income taxes. Be sure to consult a tax professional to determine if you qualify for this deduction.
3. Overall Loan Costs: Consider the total cost of the loan, not just the interest rate. A mortgage with slightly higher interest but lower origination points may be more cost-effective in the long run.

Conclusion

Understanding the difference between discount points and origination points is crucial when navigating the complex world of mortgages. Your decision to pay these points should align with your long-term financial goals and your plans for homeownership. Remember to work with your Lakeside mortgage loan consultant to calculate the break-even point to make an informed decision about whether mortgage points are right for you. In the end, the goal is to secure a mortgage that suits your needs and financial situation.