Discount and Origination Points : What are they and how can they help you?

Discount and Origination Points : What are they and how can they help you?

Mortgage points are something you have probably never heard of, and if you have, you  probably have no idea what they can do to save you thousands of dollars over the life of your loan. We are here to help you learn more about what they are and how they can help in your mortgage process.

What are Mortgage Points?

There are two types of Mortgage Points.

The first is called a Discount point, or prepaid points. They lower your interest rates by charging what you would be paying for a lower interest rate at closing; thus increasing your closing costs.  A discount point can be purchased from your lender before closing and will be based on your loan amount. Using discount, or prepaid points will help you save thousands over the life of your loan.

Origination Points are the other type of points you should look into. Origination points are charged to cover some of the cost of the origination process – for instance, these extra costs go to paying your loan officer, notary and even sometimes the home inspection.

When your interest rate is lower, you will be paying less each month.

What to Know:

There are two times you can pay discount or origination points. The first is during your initial home buying process. The second happens when you re-finance your home.  When you purchase 1 point, it can reduce your interest rate between 0.125% to 0.25%. You will want to speak to your lender about how much you will receive for each point purchased.

Discount points are often a better idea for someone planning to stay in their home for either the life of the loan, or for an extended period of time.  If you plan on staying a few years, and then turning around and selling the home, you may actually end up losing money on the loan if you choose to purchase discount points.

Tax Breaks: 

Because you are paying a form of interest on your loan you may be able to deduct them from your taxes as mortgage interest in the year you purchase your home. Origination fees do not have the same benefit.  This is something you should consider speaking with a tax adviser about.

Buying points with just a few years left on the loan is not going to be as beneficial to you. We recommend purchasing points with one of your first refinances.

Both of these cost approximately 1% of your total loan amount – but, in the long run, saving thousands of dollars over the life of your loan may be well work paying $1,500 or $2500 at the outset.

To learn more about the home buying process, and some additional tips for saving you  money check out our other article here

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