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Origination points are costs that borrowers pay when taking out a loan. Such points are especially common in the real estate and mortgage industry. These points, or fees, are paid to the bank or lending institution that is granting the loan in order to compensate the lender for underwriting and approving the loan.
Not every loan requires origination points be paid. In some mortgage loans, no points are required at all. In others, several points may be charged.
Lenders make decisions on whether to charge these points based on a number of different factors. The borrower's credit score, which indicates creditworthiness, is often a major factor in the lender's determination of whether points are appropriate. This score and other factors that indicate the riskiness of the loan for the bank determine not only whether points are charged but also how many points are assessed.
Each origination point is equal to a percentage of the total principal borrowed. Typically, each point is equal to 1 percent of the total loan. This means if you borrow $100,000 US Dollars (USD), a single origination point would cost $1,000 USD.
When a lender determines that such points are appropriate, the lender must disclose these points to the buyer. Typically, an explanation of the costs and points assessed is included in a good faith estimate provided to the borrower. The borrower may then determine how much the mortgage loan will cost, factoring in the cost of the points, in order to decide which lender is offering him the best deal.
Origination points are distinct from discount points. Discount points are assessed when an individual wants to reduce his or her mortgage rate. When a borrower purchases discount points, each point he purchases results in a 0.125 percent discount on the interest rate he will pay on his loan.
There are several fundamental differences between origination and discount points. First, borrowers can generally decide if they want to pay discount points, whereas if a lender determines that origination points are required, a borrower must pay to get the loan. Second, discount points are tax deductible, while origination points are not.
A borrower who wishes to avoid origination points can seek a "no cost" mortgage. Buyers, however, should be aware that no true "no cost" mortgage exists. Some closing costs and fees are always charged — such as appraisal fees and title fees — but those costs may be paid by the seller or rolled into the loan itself so a borrower can buy without paying any up-front closing costs.