| Origination
Points - What they are and how they work.
Origination points are commission points charged by the Lender or the
Loan officer for their work in originating the loan. It is essentially
prepaid interest. In other words, the Lender or Loan officer tacks on
origination points as their fee for evaluating, preparing, and submitting
and closing a proposed loan. Although this is not always the case, it
is a very common practice. These points may also pay for some of the closing
costs. You may be able to negotiate the origination points, but this may
cause the interest rate to increase. This increase in the interest rate
is often called the yeild spread and the
mortgage broker receives back end fees from the lender. The cost of these
origination points should be negotiated before closing on the loan. There
are some lenders that will not charge a higher interest rate or origination
points. These are usually Credit Unions or specialty lenders, and may
have more risky loan programs such as ARMs.
Origination points (or fees) are often expressed
as percentages:
1 point = 1%
If
the Proposed loan = $150,000 then 1 origination point = $1,500
($150,000 * .01 = $1500)
Or
If the Proposed loan = $125,000 then 2 origination points = $2,500
($125,000 * .02 = $2500)
Since Origination
points are considered prepaid interest, they are most often tax deductable.
As always, though, you should seek tax counsel from your accountant, tax
professional, or the IRS.
Knowing more about origination points and their purpose will help you
in your search for the right loan. There are many competetive offers out
there, and if you work the lenders against each other through careful
negotiation you can easily lower the cost of your mortgage.
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