Mortgage origination points are fees charged by your lender to pay for the process of underwriting and approving your home loan application. These fees are not standardized. They can vary widely by lender, so you may be able to negotiate their costs.
Let’s take a look at origination points, how they work, and how they're different from discount points.
Definition and Examples of Origination Points
Originating a loan is a time-intensive process. Banks must create all the paperwork associated with a home loan in addition to pulling your credit score, going over your bank statements, verifying your income and savings, and ensuring you’re creditworthy. They'll charge you a fee in exchange for all this labor. These charges are called “origination points.”
There's no standardized system for these fees. Some banks will charge you a percentage of the loan amount; others will charge a flat fee. The percentage charge is the most common. One percent of the loan typically equals one origination point.
- Alternate names: origination fee, mortgage origination fee
How Origination Points Work
Let’s say you’ve entered into a sales agreement for a new home with your partner. Although the market is tough, your offer was accepted and you’re now in escrow. You received a preapproval from your bank before making your offer. The bank begins the paperwork to complete your home loan application now that the contract is signed.
This is a time-consuming process. The average time to close a home loan is 49 days, according to ICE Mortgage Technology, although your timeline can change depending on what type of loan you’re taking out.
Banks can choose to charge you a flat fee for the process of originating your loan, although most will charge between 0.5% and 1.0% of your total loan.
This means you'll be borrowing $320,000 if you’ve applied for a home loan of $400,000 with 20% down. A bank charging 1% in origination points then will charge you $3,200 for its work.
Points paid for specific services, such as preparation costs for a mortgage note, notary fees, and appraisal fees, are not interest and can’t be deducted, according to the IRS.
Not all lenders charge an origination fee. You’ll want to compare rates for these banks with others. Not including origination points may mean the bank has opted to charge a higher interest rate as compensation for its work.
Origination Points vs. Discount Points
|Origination Points||Discount Points|
|Charged to pay for a lender to review, process, and approve your home loan application||Charged in order to “buy down” the interest rate on your loan|
|Not tax deductible||Tax deductible|
|Non-standardized||Points are calculated according to the value of your loan|
There are some pretty big differences between origination points and discount points. Discount points are standardized and governed according to the value of your loan. You use these to lower the interest rate on your mortgage. Each point you buy will drop the interest rate by a corresponding amount.
You can opt to buy one point for $1,000 if you’re looking to purchase discount points on a loan of $100,000. Similarly, you can opt to buy two points for $2,000. Discount points don’t have to occur in whole numbers. You can choose to buy 2.76 points on a $100,000 loan for $2,760. The amount that your interest rate will be reduced will depend on your lender, the type of loan, and the overall market.
These are in contrast to origination points, which are charged at a bank’s discretion and can be either a flat fee or a variable percentage. Banks can also opt not to charge origination points at all.
- Origination points are the fees charged by banks in return for reviewing, processing, and approving your home loan application.
- Origination points are non-standardized and can be a flat fee, a percentage of your total loan, or no charge at all.
- Discount points and origination points are two separate charges. Discount points act as prepaid interest and drop the overall interest rate on your mortgage.
- Origination points, as well as notary fees and appraisal fees, are not tax deductible.
PennyMac Loan Services, LLC. "Mortgage Origination & Discount Points: Understanding the Basics." Accessed Jan. 28, 2022.
ICE Mortgage Technology. "December 2021 Origination Insight Report." Page 4. Accessed Jan. 28, 2022.
Rocket Mortgage. "Mortgage Origination Fee: The Inside Scoop." Accessed Jan. 28, 2022.
IRS. "Topic No. 504: Home Mortgage Points." Accessed Jan. 28, 2022.