If you've made it to the homebuying finish line (i.e., closing), hearty congratulations are in order. Bravo! This is the stage of the process that consummates a very lengthy but worthwhile homebuying experience, especially if you braved the waves and purchased during the pandemic. While you've made it to the end point, you may be surprised to know that there are some additional costs associated with your purchase.
So while the end is in sight, there are a few more steps you'll have to take to complete the homebuying process. You'll have to pay mortgage points to solidify the deal.
Mortgage points can take the shape of either origination points or discount points. While they both originate from the same real estate concept, the two terms are not quite the same. And there are pros and cons of buying points. Let's dive in to learn what the difference is between these two terms that stand between you and your new real estate.
An origination point, also known in the real estate industry as an origination fee, is a fee homebuyers pay to the mortgage broker or mortgage lender for originating a new mortgage loan. The origination fee neither increases nor decreases the cost of the mortgage; it's an expense in addition to the mortgage and, depending on your mortgage loan provider, could consist of several line items including:
- Processing the mortgage application.
- Underwriting the mortgage.
- Funding the mortgage loan.
- Any additional administrative services.
In addition to origination points, you'll also be exposed to discount points during closing.
Discount points are an upfront cost that homebuyers can pay to the lender directly during closing in exchange for a lower interest rate. Unlike origination points, which do not reduce the cost of your loan, discount points can reduce the interest rate of the mortgage and ultimately will reduce your monthly mortgage payment.
In general, every point is a percentage of the homebuyer's mortgage interest expense.
Since points are equivalent to prepaid interest, purchasing points is a tool homebuyers can use to create savings over the lifetime of the mortgage. So if creating a monthly savings is your aim, purchasing mortgage points may be a great way to stay ahead of the savings game.
Additionally, there may also be some tax breaks for investing in this savings opportunity.