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Understanding the difference between mortgage points and origination fees allows you to determine which lender has a better loan. Discount points are fees that allow you to buy down your interest rate, therefore lowering your monthly payment. Origination fees are points the lender uses to cover overhead costs for the loan.
Origination and discount point fees will be paid at closing. In a refinance the fees can be added to the total amount being financed, which will make your closing costs or monthly payment higher. Basically, if you finance $100,000 and pay one origination fee and one discount point, you will be at $2000 in fees. Most lenders do not charge more than four percent because anything higher would be considered predatory lending.
Discount points should be carefully considered. Rates vary daily and sometimes the amount of points charged to lower an interest rate do not provide a benefit. Consider your monthly payment and how long you plan to stay in the home. For example, consider if you are offered a 6% rate with zero points and a 6.25% rate with one point. Assuming a loan amount of $100,000, the cost for a 6.25% rate is $1000. The monthly savings will be $16.17. The yearly savings translates to $194.04. Therefore, it will take a very long time to recoup the initial $1000 investment.
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