Discount Points and Origination Points

Discount points refer to an amount of money paid to a lender to buy down the interest rate. The cost of each point generally equals 1% of the total principal amount of the loan. For instance, if a loan is for $100,000, one discount point equals $1,000. Each point purchased typically reduces the interest rate by 1/8% (0.125).

Borrowers who purchase discount points gain the benefit of lowered interest payments only if the mortgage is kept long enough to save money from the decreased interest payments.  If the purchaser does not plan to stay in the home for a period long enough to recover the cost of buying the discount points, it may not be worth buying the points.

Discount points are paid at closing and may be paid either by the buyer or the seller.

Discount points paid for residential real estate are tax deductible in the year they are paid and are itemized on Form 1040, Schedule A.

Origination points are a type of fee often charged to borrowers to cover the costs of issuing the loan.  Depending on the lender these fees may be negotiable. Each origination point generally represents 1% of the mortgage loan.

Origination points are paid at closing.