Discount Points and Origination Fees are two common industry terms that can be easily confused.
What Are Discount Points?
Discount points are fees you can pay to lower your interest rate and thus lower your monthly mortgage payment. Paying discount points is commonly referred to as “buying down” your interest rate. The more you pay in discount points, the lower your interest rate will ultimately be.
In general, each discount point you pay lowers your interest rate by approximately 1/4%, depending on market conditions. The benefit of purchasing discount points is that it provides an opportunity to invest more upfront to lower your monthly payments and reduce the overall amount of interest paid over the life of your loan. At JVM, we generally quote “No-Point” options upfront; however, buying down an interest rate at the cost of a discount point or two is always an option.
How Much Do Discount Points Cost?
One discount point has a set cost of 1% of your mortgage amount. For example, if you’re looking to purchase a $500,000 home, one discount point would cost $5,000. Paying this one-time fee of $5,000 could take your interest rate from 3.5% to 3.250%, as an example.
Because discount points vary by lender, it is essential to examine the fine print on a loan estimate before selecting a mortgage lender.
The value of a discount point fluctuates with the market. We recommend consulting your mortgage expert on the break-even point of your investment, to determine if the extra cost and timeline of future savings makes sense for you. Discount points are often tax-deductible as well – an extra benefit to weigh during your decision.
What Are Mortgage Origination Fees?
Mortgage loan origination fees are charges from the mortgage company to help cover their operating costs for processing a loan. Unlike discount points, origination fees are not reliant on the current mortgage market. The cost varies from lender to lender, which is important to keep in mind when analyzing loan estimates from different mortgage companies.
When Are Points Worth It?
The benefit of paying points on a loan boils down to 2 main factors:
- Length of time you will own the property and keep your current mortgage
- Available funds to close
If you plan to refinance or sell the home within a few years, it may not make sense to purchase points. It can take several years to break even on the initial investment. Alternatively, the longer you keep your mortgage and interest rate, the better idea it is to buy down your interest rate.
The decision to buy points is largely affected by the amount of funds available at closing. If you need your closing costs to remain low, opting for the zero points option can help reduce your total cash-to-close figure.
If you would like to weigh your options further, you can run through some different scenarios with JVM’s Client Advisors.
Have Mortgage Questions?
JVM Lending is a top-rated mortgage lender based in Northern California, with additional offices in Walnut Creek CA, Sacramento CA, Austin TX, and Dallas TX. We can provide mortgage services for any properties located in California, Texas, and Arizona. Please contact us if you have mortgage-related questions!