Mortgage fees: origination fees and discount points

Two fees, two purposes

An origination fee compensates the lender for making the loan, including origination work. It may be a flat charge or a percentage of the loan amount. Discount points are upfront charges used to obtain a lower note interest rate. They are prepaid interest and increase the lender's yield relative to making the same loan at the same rate without points. A percentage-based origination fee and discount points may use the same arithmetic, but their purposes differ.

Calculate from the loan amount

One point equals 1 percent of the loan amount, not the property's price or the down payment. Multiply the loan amount by the number of points divided by 100. For a $300,000 purchase with a $60,000 down payment, the loan is $300,000 minus $60,000, or $240,000. Two discount points cost $240,000 times 0.02, or $4,800. A separate 1 percent origination fee costs $240,000 times 0.01, or $2,400. Together these charges are $4,800 plus $2,400, or $7,200, excluding other closing costs.

A $240,000 loan branches into a 1 percent origination fee, $240,000 times 0.01 equals $2,400, and two discount points, $240,000 times 0.02 equals $4,800. The origination fee compensates for making the loan. Discount points buy a lower rate. Adding $2,400 and $4,800 gives $7,200 before other closing costs. — Same loan base, different fee purposes.

Compare cost with benefit

A point measures the fee, not the rate reduction. One point does not mean a one-percentage-point reduction in the interest rate. Actual pricing depends on the lender and loan. Compare otherwise similar loan offers, including upfront charges, the note rate, the annual percentage rate, and expected time keeping the loan. The annual percentage rate includes interest and certain finance charges; it is not simply the note rate plus the points percentage.

For a simple cash-flow comparison, divide the extra upfront cost by monthly payment savings. If paying $4,800 saves $100 per month, $4,800 divided by $100 equals 48 months to recover that cost. Keeping the loan longer favors recovering the charge; selling or refinancing earlier may prevent recovery. This simplified comparison ignores the time value of money, tax effects, and differences in remaining balances.

Disclosure and legitimate charges

15 U.S.C. § 1638 requires applicable credit-cost disclosures, including the annual percentage rate and residential mortgage originator fees. Disclosure helps compare charges; it does not make an unlawful charge lawful. For federally related mortgage loans, 12 U.S.C. § 2607 prohibits payments for settlement-service referrals and splitting settlement charges for services not actually performed, while permitting bona fide compensation for actual services. Distinguish an earned origination charge from a disguised referral payment.