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Origination fee & Discount points
July 17, 2008 by Loan Officer · Leave a Comment
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Before obtaining good mortgage rates a borrower must understand what actually is included in a ‘mortgage interest rate’. There are many factors that affect all mortgage rates in every mortgage transaction. Discount points, origination fees, Yield Spread Premium, and 3rd party fees are a few factors that can change your interest rate. This information will help a first time home buyer determine the different between an origination fee, and a discount point.
Discount points is prepaid interest that is used to lower a mortgage rate. They are tax deductible, and can help lower your monthly payments. One discount point is equivalent to 1% of your mortgage loan amount.
For example:
Purchase Price $200,000
Down Payment $40,000
Loan amount $160,000
Discount points 1% or $1,600 of your mortgage loan amount.
Discount points MAY lower your mortgage rate by 0.5% for every point paid.
Every lender is different, and may only lower your mortgage rate by 0.25-0.375%.
If your current mortgage rate was 6.5%, and you paid one discount point, then your rate can go as low as 6.125-6.25%. By lowering your rate, you will also be lowering your monthly mortgage payment. The one time closing cost will be 1,600, and will be recovered between 3-4yrs. The way to calculate this is to subtract the higher mortgage payment from the new payment, and divide it by the 1,600.
Origination fees work the same way as discount points do. One point is equivalent to 1% of the loan amount. Origination fees do not lower your mortgage interest rate. Origination fees are paid by the borrower to the bank, lender, and/or mortgage broker. This is a common charge on a HUD-1 settlement statement. This charge is associated with ‘originating’ your mortgage loan.
The cash rebate paid to a lender for selling an interest rate higher than the wholesale par rate is called Yield Spread Premium (YSP). If a borrower isn’t willing to pay origination fees or discount points, then the mortgage interest rate is raised to recover the loss of revenue. Also, if the borrower is unable to pay closing costs, the lender can raise the rate to balance the revenue made. An origination fee can be charged with the closing cost, and the rate can be raised to create more revenue. This is called ‘charging in the front, and charging in the back’.
The 3rd party fees such as title fees, title insurance, attorney/escrow, appraisal, etc. can all affect an APR of a mortgage interest rate. Many lenders do not include all fees, and this is why APR’s can be different with the same numbers on a Good Faith Estimate. If one lender is charging more fees/points, that can lead to a higher APR.
Current mortgage rates are displayed at Freddie Mac’s homepage. They update their web page weekly with rates from actual closings. They also display the average fee/points paid on a 30yr fixed mortgage, and a 15yr fixed mortgage. Do not be fooled by various ‘advertising’ websites that doesn’t verify the ads promoted by their lenders. Many lenders undercut their rates to draw borrowers, but many of these borrowers do not qualify through their terms.
The average revenue made in a mortgage transaction is approximately 2.5% in total origination fees, discount points, and YSP. Some lenders may charge more, but it is still negotiable. Mortgage lenders & Banks aren’t required to disclose YSP. You will normally see the interest rate with origination fees and/or discount points. Mortgage brokers are required to show YSP, and is disclosed on a Good Faith Estimate, and HUD-1 statement. Due to higher overhead costs, a mortgage lender and bank can charge a lot more fees than mortgage brokers.
