What are origination points?
Origination points (sometimes called origination fees) are up‑front charges a lender or loan officer can collect to compensate for creating, underwriting, processing and approving a mortgage. One origination point equals 1% of the mortgage amount. For example, on a $200,000 loan, one origination point costs $2,000.
Key distinction: origination points vs. discount points
– Origination points: fees charged by the lender for issuing the loan (covers administrative/underwriting work). They are paid at closing and are typically not deductible as mortgage interest.
– Discount points (mortgage points): optional pre‑paid interest you can buy to lower the loan’s interest rate. Each discount point normally equals 1% of the loan amount. Discount points are usually treated as prepaid interest and can be deductible (subject to IRS rules and whether the loan is for a primary residence, timing, etc.).
How origination points typically work
– Amount: Lenders commonly charge between 0.50% and 1.50% of the loan; 1.0% is a common industry average. Some lenders charge no origination points at all.
– Payment: Origination points are paid at closing as part of your closing costs, unless you negotiate another arrangement (seller concessions, lender credit, rolled into the rate/loan, etc.).
– Negotiability: Origination points are negotiable. Shopping multiple lenders and comparing Loan Estimates gives leverage to lower or eliminate them.
Simple examples
– Origination fee example: 1.5 origination points on a $150,000 mortgage = 1.5% × $150,000 = $2,250.
– Discount vs. origination (illustrative): A lender offers a 30‑year fixed rate at 4.125%. You could pay 1.524 discount points (about $4,572 on a $300,000 loan) to reduce the rate to 3.875%. That discount payment lowers monthly payments; it is not the same as an origination fee.
Tax treatment (general guidance)
– Discount points are generally treated as prepaid mortgage interest and can sometimes be deducted in the year paid (or over the life of the loan) if IRS rules are met. Check IRS Topic No. 504 for details.
– Origination points are generally not deductible as mortgage interest when they represent lender fees/overhead rather than prepaid interest. If you have questions about your particular situation, consult a tax professional.
Practical steps — how to handle origination points when getting a mortgage
Before you apply
1. Shop multiple lenders.
– Request Loan Estimates from at least three lenders. The Loan Estimate lists origination charges and other closing costs in a standardized format so you can compare apples to apples.
2. Ask explicitly about origination points.
– Some lenders advertise “no origination fee”; others bundle fees into the rate. Clarify whether quoted rates include or exclude origination fees.
3. Compare APRs as well as interest rates.
– APR includes many fees and gives a better picture of the total cost over the first year or the life of the loan, depending on the calculation.
During underwriting/negotiation
4. Negotiate the points and fees.
– Offer to accept a slightly higher rate in exchange for fewer or no origination points, or ask the lender to reduce the origination charge to win your business.
5. Consider seller concessions or lender credits.
– You may be able to have the seller pay closing costs (including origination points) as part of contract negotiations. Alternatively, take a lender credit (higher interest rate) to offset out‑of‑pocket fees.
6. Understand rate lock terms.
– If you lock a rate, confirm whether the lock includes the quoted points and whether the lock fee or rate lock changes if origination points are adjusted.
At closing
7. Review the Closing Disclosure carefully.
– The Closing Disclosure itemizes the origination charge and other fees. Ask for explanation of any charge you don’t recognize before signing.
8. Confirm what you’re paying for.
– Ensure origination fees are not double‑counted or described vaguely; request an explanation of services that the fee covers (underwriting, processing, etc.).
If you want to avoid or reduce origination points
– Shop lenders and demand Loan Estimates.
– Choose lenders advertising no origination fee or request the fee be waived.
– Ask the seller to pay closing costs when negotiating the purchase agreement.
– Opt for a slightly higher interest rate in exchange for lender credits instead of paying points.
– Use a mortgage broker to solicit multiple lenders on your behalf (broker fees may apply).
Deciding whether to pay discount points instead
If you are offered discount points to buy down the rate, run a break‑even analysis:
1. Calculate the cost of the discount points (1 point = 1% of loan).
2. Compute the monthly savings from the lower rate.
3. Divide the points’ cost by the monthly savings to get the number of months to recoup the cost.
4. If you expect to keep the loan longer than the break‑even period, buying points may make sense. If you expect to sell or refinance sooner, buying points is often not worthwhile.
Checklist before accepting a mortgage offer
– Get Loan Estimates from several lenders.
– Compare interest rate, APR, origination fee, and other closing costs.
– Ask for a written explanation of any origination fee.
– Request alternatives: fee waived, seller pays, lender credit, or higher rate/credit tradeoff.
– Confirm tax treatment with a tax advisor if you expect to deduct mortgage points.
Bottom line
Origination points are lender fees charged for creating a mortgage, commonly around 0.5%–1.5% of the loan. They are different from discount points, which are prepaid interest you purchase to lower the loan rate. Origination points are negotiable and sometimes avoidable; the best defense is shopping multiple lenders, carefully reviewing Loan Estimates and the Closing Disclosure, and negotiating how fees are handled.
Sources and further reading
– Investopedia — Origination Points (source material provided by the user)
– Internal Revenue Service — Topic No. 504: Home Mortgage Points: https://www.irs.gov/taxtopics/tc504
– Consumer Financial Protection Bureau — What are (discount) points and lender credits and how do they work?: https://www.consumerfinance.gov/ask-cfpb/what-are-discount-points-and-lender-credits-and-how-do-they-work-en-1799/
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.