Origination Fees and Discount Points - Mortgage shopping

It is a fact that there is nothing free in the world of credit. A borrower should always remember that free loans are non-existent and even if a company or agency claims one it is going to be with some hidden fees. The lender deserves to be paid for the work he/she does no doubt; however, a thorough understanding of the concept of origination points and discount should keep the borrower from paying too much for your mortgage loan. So stay warned, though. The term Points offer several meanings in the credit world. Mortgage Points refer to the loan origination fees (the underwriter's fee) or Discount Points (also known as loan discounts).

What are Origination Points?

Origination Points is the money that is paid directly to the lender for obtaining a loan to the borrower. It is from this money that your loan officer derives commission from. There are no strict guidelines to determine the exact origination point that you should be charged. It depends on borrower's credit history and if it's bad, the lender has an upper hand to demand more origination points from the borrower.

Credit Profile and Origination Points ?

There are some companies who charge more origination points than others, so it is important to carefully compare for the best offer in the mortgage market. A borrower can also negotiate for lower origination fees. If you have a great credit, you can negotiate with the lender for lower origination fees in exchange for your business.

What are Discount Points?

Discount Points is the money that a borrower pays to the lender to secure an interest rate lower than the par rate that is being offered. Discount Points form up to 1% of the total loan amount and they should be considered as prepaid interest because by paying a discount point a borrower can get lowered interest rate. Therefore before contemplating to pay either of these points a borrower should do his/her diligence of preparing a cost-savings analysis to see if paying them could pitch in any benefit.

Get Your Best Bargain of Interest With Discount Points
In majority of cases Discount Points are exchanged with the lender for a lower mortgage interest rate. However, some homeowners use these points to get better terms also. For instance, one can pay a point and get prepayment penalty waived off from loan.

It is a general rule of the thumb with paying points that if you plan to stay longer in your home it makes more sense to pay points for lowering your interest rate and remember that a borrower can knock off about 0.125 to 0.25 of a percent off the interest rate for each point paid.

Since these points are interest payments, they're usually tax-deductible although there is exception to this rule, however, with refinanced mortgages wherein only a few states follow deducting the discount points.

It is advised that the person who is contemplating of acquiring a mortgage should have a basic understanding of these points to derive maximum benefit from the lending agency.