What Are Origination Points?

Origination points are a type of fee borrowers pay to lenders or loan officers to compensate them for the role they play in evaluating, processing and approving mortgage loans. Credit history is one factor that plays a role in the amount of origination points that apply to a borrower. Unlike other types of points (for example, discount points), origination points are not tax deductible.

Understanding Origination Points

Origination points vary from lender to lender, but typically, each single origination point represents 1% of the mortgage loan. For example, if an individual is borrowing $150,000 and the bank is charging the individual 1.5 origination points, they will pay $2,250 (or 1.5% of $150,000) in points.

Discount Points and Origination Points

There are two types of points: discount points and origination points. Discount points are interest that is prepaid on the loan, and they are tax deductible. The interest rate will be lower depending on the more points a borrower pays. Depending on how much a borrower wants to reduce their interest rate, they can pay up to four points or zero points. Origination points are the costs that the borrower must pay the lender for extending the loan. The cost of the points is tax deductible it is used for the mortgage and not for closing costs. According to the IRS, if the fee is for items that appear on a settlement statement such as inspection or notary fees, the cost is not tax deductible.

Should a Borrow Pay Origination Points

Whether is borrower should pay origination points depends on factors such as how much they have to put down as a deposit at closing and how long the borrower intends to stay in the house. If points are paid to lower the interest rate, that is an advantage if the borrower plans to stay in the house for a long time because the mortgage payments will be lower. However, if the borrower needs to reduce closing costs, paying zero points is the best choice.

An Example of Origination Points

USmortgagecalculator.org gives the following example of a lowered interest rate by paying points. Below are example rates for a 30-year fixed rate mortgage (FRM) from Lender X:

Rate Points APR
3.875% 1.524 4.075%
4.000% 0.461 4.111%
4.125% 0.000 4.197%

The par rate for a 30-year FRM is 4.125%. If an individual borrows $300,000 for a new home, the interest rate can be reduced to i) 3.875% by paying 1.524 points (i.e., $4,572) or ii) 4% by paying 0.461 points ($1,383) to the lender.

Borrowers should research lenders and inquire about origination points because they might be able to negotiate the number of origination points that they pay.