Discount and origination points, explained

Do you know the difference between discount points and origination points? These are two important terms any home buyer should understand.

Each type of point is equal to 1 percent of your total loan amount. For example, on a $200,000 loan, one point would be equivalent to $2,000.

Discount and origination points, however, do different things. Origination points are paid to loan officers. Some mortgage companies charge origination fees in the form of a point, while others just charge a set amount for originating a mortgage loan. Origination points are generally not tax deductible.

Discount points are essentially prepaid interest. Each time you purchase a point, you have the opportunity to lower your mortgage rate by a fraction of a percent. Paying for a discount point or two is a way to “buy down” your mortgage rate. If you itemize your taxes, discount points may be tax deductible, just like mortgage interest. (Tax laws do change over time, so it’s important to consult a tax professional about your home purchase.)

When it comes to discount points, you may wonder if they make sense for you. A big factor is whether you have the extra cash and whether you’ll be in your home long enough to make the upfront cost worth it based on the savings from a lower mortgage rate. The longer you plan to be in your home, the more it makes sense to pay the upfront cost to get a lower mortgage rate. Questions? We’re here to answer all of your home financing questions.