Confused about the difference between discount points and origination points? Join the club. Most home buyers are. But knowing the different between the two can help you get the best possible deal on your home loan.
For starters, each type of point is equal to 1 percent of your total loan amount. For example, on a $200,000 loan, one point would equal $2,000. But what each type of point does is very different.
Origination points are paid to loan officers. Some mortgage companies charge origination fees in the form of a point, while others just charge a set amount. Origination points are not tax deductible.
Discount points, on the other hand, are essentially prepaid interest. Each time you purchase a point, you lower your mortgage rate, typically by 0.25 percent. Most lenders provide buyers with the opportunity to “buy down” their mortgage rate by paying one or more points. If you itemize your taxes, discount points may be tax deductible just like mortgage interest.
Should you try to get a lower rate by paying points? It all depends on how much you need to pay at closing and if you can afford to pay the extra amount. It also depends on how long you’ll be in your home. The longer you plan to be in your home, the more it makes sense to pay the upfront cost to get a lower mortgage rate. Want to know more? Read this report that can help you learn more about this essential part of getting a mortgage.