What are Origination Fees and Discount Points?

A mortgage broker charges an origination fee commonly referred to as points, it is considered a “commission” for arranging your loan. The lender also charges points, commonly referred to as “discount points”, which is considered pre-paid interest to enhance the return to the lender on their investment over and above the stated interest rate on the note which gives the lender additional incentive to take the risk and make you the loan. Sometimes for convenience purposes in quoting fees, the two are combined together and simply referred to as points.

While we do not give tax advice, “points” are usually fully tax deductible as prepaid interest on a purchase. They are usually deductible on a refinance as well, but usually spread out over the term of the loan. Monthly mortgage interest paid is also usually deductible on your taxes as well.  Please consult your Tax Advisor on these matters.

How Much $ is a “Point”?

A “point” equals one percent of a loan amount. For example, one point on a $70,000 loan is 1% of $70,000 which equals $700.00. Points are charged on the loan amount, not on the purchase price. If you were buying a $100,000 home taking out a $70,000 loan, and there were 3 points origination fee, a 3 points loan discount, you would add the two together, to arrive at 6 points, and then take 6% of $70,000 to arrive at a points cost of $4,200.00.