Could someone please explain the difference between points and percentages and how they affect mortgage payments?

points are “precentage points” usually origination or discount points.

Eg. a loan with 14% interest rate (simpe interest) is the loan amount X 14%/12 months. It may have severl “points” in origination where the lender makes money for originating (origination points) or getting a lower rate (discoun points). these “points” are a percentage of the loan amount. 5 origination points is the same as 5% of the loan amount. They can be rolled into the loan or paid upfront by the borrower @ closing.

Hope this help!

Discount points are considered pre-paid interest and are therefore tax deductible. Origination is a fee charged by the lender for originating the loan. Origination is also tax deductible but only in a percentage of the amortization period.

1 point = 1% of the loan amount

so for example

$100,000 loan, 1 point = $1000.

Discount points and origination points are essentially the same thing. Each point you pay should result in a lower interest rate.

So… if 1 point = 1 percent then I don’t understand why we have both points and percentages… I don’t understand the whole origination thing.

RJ,

Discount and origination are not the same thing. Origination is a fee charged by the lender. Discount is pre-paid interest used to buy the rate down.

Paying one origination is not going to get you a cheaper rate. That is what your broker is charging you to originate the loan.

Lithix,

Origination is a fee that is charged by your lender for originating your loan, finding a lender, handling and arranging the appraisal and title, and all the other numerous things that go into closing your loan. It is how your broker gets paid.

Ah ok - starting to make a little more sense.

Chris-

How is RealNet doing these days? That’s the first company I started with back in the day.

Lithix-

The way I explain points to my clients, whether they are origination points or discount points are that 1 point = 1% of the loan amount just to make it simple. The calculation is the same whether you are talking about origination points or discount points. I found out early on in the mortgage business that if I try to explain the difference between origination and discount points, it confuses many people.

And, correct- the definition of origination points and discount points is different, but in reality, points are points are points.

A broker can do a no points loan, by charging a higher rate and getting paid yield spread premium (a percentage paid to the broker by the lender), in which case you can do a, 0 points loan (0%) (0 origination points, 0 discount points). Or, the broker can lock in a lower rate for their client, and instead charge the borrower directly, a 1% origination fee perhaps. Or, if you technically want to call it a discount point, then you can call it that.

Here is an example:

30 yr fixed, 6.5%, 0 points (0 origination points, 0 discount points)

[i]30 yr fixed, 6.25%, 1 point (1% origination fee, 0 discount points)

OR

30 yr fixed, 6.25%, 1 point (no origination fee, 1% discount points)[/i]

So in this scenario, by paying 1 point, or 1% of the loan amount, you are obtaining a rate that is .25% lower than if you pay no points. So you pay more up front, but save money over the long term. The cost is the same to the borrower at the 6.25% rate whether the point is charged as an origination fee or a discount point, and the broker commission is the same.

I have done many loans throughout the years with no points- no origination, no discount.

If a broker tells you he or she “has” to charge an origination fee, or that their company charges an origination fee to do the loan, then they are telling you a half-truth- some companies may require it, but you should also get lower rate than a comparible loan with no points, no origination, no discount points.

RJ,

RealNET is good. Want to hear something funny, I started out at PrimeLending as my first broker/banker job. I still have a ton of friends at the Frankford Crossing branch. Small world

Chris- That is funny. I think they are both good companies- we actually aren’t in Dallas, we are Colorado based. Our whole branch made the switch back in 2002. Yes, definitely a small world!