by Roshan Richards

Created on: September 27, 2009   Last Updated: October 11, 2010

Many financial terms are thrown around when one enters into the mortgage arena which can cause confusion for any borrower. Accordingly, one of the most common questions asked of any mortgage specialist is: What are points?

There are two types of points that are referred to when discussing a mortgage, and both are outlined on the Good Faith Estimate (GFE) which is given to the borrower around the time of pre-qualification.

ORIGINATION POINTS

When the term points is used in mortgage conversations it is referring to origination points. They are listed on line 801 of the GFE page. Simply put, origination points are the predetermined percentage of the total loan amount paid by the borrower to the mortgage specialist for originating the loan.

If the origination is 1 point, that is the same as saying 1 percent. This is equivalent to $2,000 on a $200,000 loan amount. Two points equals two percent, or $4,000 on a $200,000 loan, and so on. It is standard to pay 1% or 1 point for the origination of one's loan, but sometimes exceptions apply. Do not hesitate to ask for an explanation if the GFE shows an origination higher than 1 point.

DISCOUNT POINTS

Located on line 802 of the GFE, discount points are not to be confused with origination points as they serve an entirely different purpose. Whereas points are the fee that is paid for the procurement of a mortgage loan, as outlined above, discount points are optional and are paid in order to permanently reduce the rate on one's loan.

Discount points can be a very good investment to lower the monthly payment of a loan, as well as reducing how much interest is paid on the loan overall. A little bit of money placed here at closing can save much more in the long run. The feasibility of this option should always be discussed with one's mortgage specialist to determine how deep of a discount should be purchased, if at all.

Just as it is important to know basic mortgage terms such as points, origination, and discount points, it is also vital for one's peace of mind to be completely satisfied with the process of obtaining a mortgage with all of its fees. Mortgage specialists are advocates for borrowers and should be able to answer any mortgage related question their borrowers have for them. Never be embarrassed to ask.

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