In the United States, it is common for lenders to give quotes in both loan rates and points. This is two different systems for measuring the cost of a loan.
Example: You approach a bank to ask about a home mortgage loan and they offer you a 30-year long $250,000 loan with an interest rate of 4% with a charge of 1 point.
What does this mean? It means that you will be paying a special fee to the lender and the size of this fee is 1% of the borrowed amount. $250,000 x 0.01 = $2,500.
The origination fee is a fee that you pay to the lender when you obtain your loan.
Instead of simply saying that you have to pay a fee equaling 2% of the borrowed amount, the lender says that the cost of the origination fee is 2 origination points. If the fee equaled 1% of the borrowed amount, the origination fee would be 1 origination point, and so on.
Origination fee is not the same as application fee. An origination fee is only charged for a loan that both the lender and the borrower have accepted and that is about to be paid out to the borrower.
In the United States, the origination fee is normally tax deductible provided that the fee was actually paid to obtain the loan and not as a cover for other closing costs (e.g. appraisal, inspection, notary fee, etc.) For more information, contact https://www.irs.gov.
As mentioned above, discount points is a roundabout way of saying that if you pay the lender some extra money right now, the lender will decrease the nominal interest on your loan. The more discount points you pay, the lower the interest rate. There upper limit is usually 4 discount points.
In the United States, discount points are tax deductible, since they are essentially just a different way of paying interest on your loan.
This article was last updated on: February 12, 2018