What it means
When you take out a mortgage or a business loan, the interest rate is only part of the price. The lender also spends money on assessing your application, checking documents, valuing the property and preparing the legal paperwork.
Origination points are how many lenders and brokers charge for that effort. A point is simply one per cent of the loan, so a lender who asks for 1.5 points on a $300,000 loan is asking for $4,500.
The fee is usually shown on the standard loan disclosure that the borrower receives before closing. Because it is calculated on the loan amount, a larger loan means a larger fee even though the work involved may be much the same.
Origination points are often confused with discount points, but they do different jobs. Discount points are optional and are paid in return for a lower interest rate, while origination points pay for the service of creating the loan and do not reduce the rate.
A borrower comparing two offers should therefore ask which type of point is being quoted. The fee matters because it raises the true cost of borrowing.
A loan with a lower stated rate but high origination points can cost more over a short holding period than a loan with a slightly higher rate and no points. The annual percentage rate, which folds most upfront fees into one figure, is designed to make that comparison fairer.
Points can sometimes be negotiated, rolled into the loan, or replaced by a lender credit in exchange for a higher rate. Whether the fee can be deducted for tax purposes depends on the rules of the tax authority and on how the loan is used.
A borrower should seek advice rather than assume.
In practice
Real-world examples.
Example
A couple buying a home borrows $400,000 and is quoted 1 origination point. At closing they pay 400,000 x 1% = $4,000 on top of their deposit, which they had not factored into their savings target. They now ask earlier about all closing costs.
Example
A family-owned bakery arranges a $150,000 equipment loan through a broker who charges 2 points. The $3,000 fee covers the broker's work in finding a lender and preparing the application. The owner compares this against what the bank itself would charge directly.
Example
A property investor planning to sell within two years finds that a loan with no points and a slightly higher rate costs less overall. Spreading the upfront fee over only two years makes the loan with points more expensive per year, even though its stated rate is lower.
Formula
Calculation
Origination points fee = loan amount x number of points x 1%
Cost per year of holding = fee / number of years the loan is held
A business owner takes a $300,000 loan with 1.5 origination points. The fee is 300,000 x 1.5 x 0.01 = $4,500, so the borrower receives 300,000 - 4,500 = $295,500 if the fee is deducted from the proceeds, while still owing interest on the full $300,000. If the loan is held for 5 years, the fee adds 4,500 / 5 = $900 a year to the cost of borrowing, which is 0.3% of the original loan each year.Case study
Seen in the real world.
Oakmere Interiors is a fictional furniture business, and this story is illustrative. The owner needed a $200,000 loan to open a second showroom and was offered two deals: Lender A at a rate of 7.0% with 2 origination points, and Lender B at 7.4% with none.
At first glance Lender A looked cheaper. The company accountant calculated that the points cost 200,000 x 2% = $4,000 up front, while the extra 0.4% in interest on Lender B cost 200,000 x 0.004 = $800 a year.
Because the business planned to refinance within three years, the accountant compared $4,000 against 3 x $800 = $2,400. Lender B was the better choice by $1,600, and the illustrative lesson was to divide the upfront fee by the expected time the loan will be held.
Watch out
Common mistakes.
- Comparing loans by interest rate alone, ignoring points and other upfront fees that raise the real cost.
- Confusing origination points with discount points, when only the latter buy a lower interest rate.
- Forgetting to estimate how long the loan will be held, which decides whether paying points is worthwhile.
Questions
People also ask.
Are origination points negotiable?
Often yes, because lenders and brokers compete for business, and asking for a reduction or a waiver costs nothing.
Can origination points be added to the loan balance?
Sometimes, but doing so means paying interest on the fee for the life of the loan.
How do I compare offers with different points?
Use the annual percentage rate as a first step, then divide the upfront fee by the number of years you expect to hold the loan.
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