What Are Origination Points on a Mortgage?

Mortgage financing involves various fees, including origination points. These points are a fee paid to the lender at closing on a home loan. Understanding origination points and their function is important for anyone navigating home financing.

Defining Origination Points

Origination points are fees charged by a mortgage lender to cover administrative costs associated with processing a new loan. These costs typically include expenses related to evaluating the loan application, underwriting the loan, and other administrative tasks involved in setting up the mortgage.

One origination point is equivalent to one percent of the total loan amount. For example, if a borrower secures a $300,000 mortgage, one origination point would cost $3,000. These points serve as a way for lenders to recover their operational expenses and manage the risk associated with extending credit. The exact number of points charged can vary among different lenders.

How Origination Points Are Calculated and Paid

Origination points are calculated based on the mortgage’s principal amount, not the home’s purchase price. For instance, on a $400,000 loan, 1.5 origination points would amount to $6,000 (1.5% of $400,000).

These points are typically paid upfront as part of the closing costs. Borrowers can find the specific amount of origination points listed on important disclosure documents, such as the Loan Estimate and the Closing Disclosure. These forms provide a transparent breakdown of all fees associated with the mortgage, allowing borrowers to review and understand the costs before committing to the loan.

The Relationship Between Points and Interest Rates

Origination points often have a direct relationship with the interest rate offered on a mortgage. While some points, known as “discount points,” are specifically paid to reduce the interest rate, origination points are primarily for covering lender costs. A mortgage’s overall pricing can reflect a trade-off. A lender might offer a lower interest rate if a borrower agrees to pay more in upfront origination points, or conversely, a higher interest rate with fewer or no origination points.

For example, a mortgage with zero origination points typically comes with a higher interest rate over the loan’s term. Conversely, paying a higher amount in origination points can result in a comparatively lower interest rate. This allows borrowers to choose a payment structure that aligns with their financial goals and cash availability.

Evaluating Origination Points for Your Mortgage

When considering whether to pay origination points, several factors warrant evaluation. The length of time you plan to keep the mortgage is a significant consideration. Paying points to secure a lower interest rate generally provides greater savings over a longer loan term, such as a 30-year mortgage, because the reduced monthly interest accumulates more substantially over time.

A key concept to understand is the “break-even point,” which is the duration it takes for the savings from a lower interest rate to offset the initial cost of the points. If you anticipate selling your home or refinancing your mortgage before reaching this break-even point, paying points might not be financially advantageous. Additionally, the availability of cash at closing plays a role, as paying points increases the upfront funds required to complete the mortgage transaction.

Origination points, specifically those considered prepaid interest, may be tax-deductible under certain conditions. The Internal Revenue Service (IRS) generally allows for the deduction of points paid for a mortgage used to buy or build a primary residence, provided certain criteria are met, such as the points being a normal business practice in the area and not excessive. This deduction is typically claimed as an itemized deduction on Schedule A (Form 1040). However, points paid for refinancing a loan are generally deducted over the life of the loan.