The Difference Between an Origination Point and Discount Point
Today’s post is about teaching you a little something! YAY!
We are going to talk about “points”…mortgage points. It has occurred to me that a lot of people don’t truly have a grasp on what they are and what they do. So here you go…
First, 1 point is equivalent to 1% of the loan amount. So, on a $100K loan, 1 point = $1000.
.875 points = $875
.75 = $750
.5 = $500
you get the point (ha ha a funny pun!)
Now, what you don’t know is that there are 2 different kinds of “points”!
Origination Point: This is a fee that a mortgage company charges you that is basically just pure profit. It is a fee in addition to their processing/underwriting/admin fees.
Discount Point: This is a fee that you are charged to buy down your rate to a particular lower rate than you would get if you did not pay the extra cost.
When a mortgage person talks about the “par” rate, it means the “even money” rate…the rate at which you are being charged NO discount points, but you have to be aware that they still may charge an origination point! So, check on that!
When is it a good idea to pay discount points in order to buy the rate down? The answer depends on cost vs. savings vs. time to break even in your investment. There are so many people that only care about getting a super low rate, that they think it is a a great idea to pay points to get there…but they don’t think about the other “stuff” that should really determine what they should do. Sometimes, it is better to take a slightly higher rate and not pay all of those extra fees. It really depends on how long you plan on staying in the home, what your long-term plans are and of course, how long will it take you to break even. Maybe it’s just better to save your cash!! I mean, is paying an extra $4k on a loan in fees really worth saving $40/month on? Prolly not, unless you are going to stay in the home for a long long time.
What about those low rates that I see advertised on the internet? I will bet you $50 bucks that they all have points associated with them. Quicken loans is one of the worst about this and I have written about them in a previous blog post. ALWAYS READ THE FINE PRINT! Scroll down to the bottom of that page, people! That is where the good stuff is…the real deal.
Why do some mortgage companies charge an origination point? Extra profit.
So, before you go paying any points, please do your homework! Think about your lifestyle, what your longer-term plans are and definitely read all of the fine print before you make any decisions.
The more you know! 🙂
This is me…the World Champion of Educating YOU! Ha!!
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