Explaining Mortgage Discount Points In Plain English
Younger prospective homeowners and first time home buyers must familiarize themselves with the so-called mortgage discount points. While borrowers don’t love them, lenders do love them a lot. However, for better or for worse, mortgage discount points will always remain a part of the large fabric of the industry of mortgage loan. It is important that you know the difference between the two primary types of mortgage points, discount and origination, for you to save some cash on your next refinance or home purchase.
What are Points?
A single point, either discount or origination, is equivalent to one percent of the new mortgage loan. This means that if you need a loan amounting to $150,000 and this has one point, you will also be paying an extra $1,500 to the mortgage lender at the closing for your new residence. The amount is added to the other closing costs you have, such as title insurance, appraisal, escrow and legal fees, survey, as well as other forms of miscellaneous expenses. If the loan comes with a discount and an origination point, you will have to bring $3,000 for the points and every remaining cost for closing.
What are Mortgage Discount Points?
You will definitely prefer to have the lowest rate of interest available for your new loan. The lender could offer you a single interest rate then tell you that they can lower this rate if you will be paying one or several discount points. For instance, your options for the fixed rate mortgage could be 0 points and 5.5 percent, 1 point and 5.25 percent, and 2 points and 5.0 percent. These fees allow your lender to discount the interest rate that was stated. The discount is usually equivalent to one quarter to 3 eights of 1 percent for every point paid.
Origination vs. Discount Points
Not like discount points that could offer lower interest rate, the original points are your lender’s much welcomed source of income, while being a directly added cost for. While it may appear a bit annoying, you have to understand the position of your lender. Since many mortgage loans end up being sold to secondary market, lenders never get to enjoy earning interest during the lifespan of your loan. These origination points provide some sort of immediate income to the lender, or it could at least offset the value of making the loans. When you pay two points for the next mortgage, it is possible that one is a discount point while the other is meant for origination.
Negotiate for Points
Never be afraid to negotiate because both origination and discount points are negotiable even when your lender tells you that they are not. After understanding the differences between the two, you should know that origination points are completely discretionary. Discount points are valuable to you, and may have lesser negotiability compared to the origination variety. But, you will still be able to save precious cash through convincing the lender to decrease the points they ask for.