First-time home buyers and younger prospective homeowners should become familiar with mortgage discount points. Lenders love them, and borrowers do not. But for better or worse, they are a part of the fabric of the mortgage loan industry. Learn the difference between the two types of points -- origination and discount -- to save money on your next home purchase or refinance.
One point -- either origination or discount -- equals one percent of your new mortgage loan. Therefore, if you need a loan of $150,000 and it has one point, you'll also pay an additional $1,500 to your mortgage lender at the closing for your new "castle." This amount is in addition to your other closing costs, like appraisal, title insurance, legal and escrow fees, survey, and other miscellaneous expenses. Should your loan come with an origination and a discount point, you'll need to bring $3,000 for points and all remaining closing costs.
You want the lowest interest rate available for your new mortgage loan. Your lender may offer you one interest rate, and advise you that they can lower your rate if you pay one or more discount points. For example, your choices for a fixed rate mortgage might be 5.5 percent and 0 points, 5.25 percent and one point, and 5.0 percent and two points. These fees permit your lender to "discount" the stated interest rate. The discount often equals one-quarter to three-eights of one percent per point paid.
Discount Vs. Origination Points
Unlike discount points, which at least offer a lower interest rate, origination points are a welcome source of income for your lender -- and a direct added cost for you. As annoying as this may appear, you should understand your lender's position. Since most mortgage loans are sold into the secondary market -- to Fannie Mae, Freddie Mac, or private buyers -- lenders never even enjoy earning the interest over the life of your loan. Origination points deliver the lender some immediate income -- or, at least, offset the cost of making their loans. If you pay two points for your next mortgage, one is probably a discount point and one point is probably dedicated to origination.
Points Are Negotiable
Don't be shy. Both discount and origination points are negotiable, even if your lender maintains they are not. Now that you understand the difference, you know that origination points are totally discretionary. Discount points do have value to you, and may have less "negotiability" than the origination variety. Yet, you may still save some precious cash by convincing your lender to reduce the points they request. You'll typically have more negotiating success during periods of lower mortgage volume than during "boom" periods, such as occurred in the early 21st century. However, the potential savings are worth the negotiating effort.
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