What is the basic difference between origination fee and discount fee also known as line 801 and 802?

4 Comments

1. togashiyokuni2001 December 30, 2012

   Origination fee is the fee you pay the broker for finding the loan for you. It does, but doesn’t, affect the rate.

   Discount fee is what you pay the bank to drop the rate of the loan. That’s what is referred to as “points” in all the commercials you see.

   Now, when we talk about mortgages, we use the words “points” and “bips” pretty regularly. A point is merely one percent of the loan amount, and can be used as such when talking about anything, because so much of what we do is percentages. A bip is what we call a Basis Point, or 1/100th of a point. So when someone says “add 50 bips to the rate,” they are adding 0.50% to the rate.

   I also said that origination does, but doesn’t, affect rate. What I mean by that is, it can be changed without changing the rate, but what many originators do is use the yield spread premium line. Anyone that originates a mortgage gets paid based on origination fee and yield spread. Origination (or front side) is what you pay out of your pocket. Yield spread (or back side) is paid by the bank based on the program and rate. What many originators will do is sell you a loan based on rate, and then try to find a program that will give them that rate with the most yield spread, and if it’s not enough, they’ll charge on the front side to make up the difference. The downside to yield spread is that it raises the rate the more of it there is, and many people see this as dirty pool. However, if you’re trying to keep out of pocket costs low, and the extra interest won’t make much of a difference on the loan, back ending the deal can be very helpful. In this business, there are no bad loans, just bad loan officers.
2. Yanswersmonitorsarenazis December 30, 2012

   Origination fee is meant to be the payment you pay for the service provided by your loan officer in securing the loan.

   Discount points should be a fee paid to reduce the interest rate below what is generally being offered with only an origination fee.

   Ultimately, as you seem to know, it’s really just semantics. The dollars are completely interchangable, and there is absolutely no advantage or disadvantage to either. They are the same thing, in the end. Simply because you could also choose to accept a higher rate in lieu of paying the origination fee. Which means that the origination fee is really just a discount point anyway.

   Many loan officers don’t like being grilled about their fees, because they might find them hard to justify. I personally have no problem telling my clients all about it. I perform a service. I get paid to perform this service. This is my expected income for this service. How I get paid is up to you: 1. You pay me and take the lowest rate possible. 2. Both you and my investor pay me, and you take a balance of lowest rate and lowest costs. 3. Only my investor pays me, and you take a higher rate.

   All have their uses. If you’re only going to be in that loan for 2-3 years, take the higher rate and pay less costs upfront. If you believe you will hold that loan for 3-5 years, the middle-road option is probably best. 5-30 years, paying some points upfront will likely save you money.

   Ultimately, trust your gut. If you don’t feel like you are being dealt with honestly, you’re probably right. Perhaps it’s time to seek out a new loan officer. Ask for some referrals from people you know.
3. DSURF1978 December 30, 2012

   A little help for you I am a mortgage broker and to explain the difference is that there is no difference its just another way to charge you a point by not saying they are charging you a point they are both 1% of the loan amount
4. Darren Meade December 30, 2012

   Hello –

   Discount Fees are tax deductible.

   Origination Fees are NOT!

   Today, I see a mortgage, more than ever, not as a mortgage loan once was, but instead as a financial planning instrument that must be integrated into your long and short term personal financial plan. What is your overall mortgage strategy?

   * How old do you want to be when your home is paid off or until paying it off your home is a strategic decision?

   * What is the local unemployment rate and job growth forecasts for the community in which your looking to buy a home?

   * What percentage of your monthly income will you be paying toward your mortgage each month?

   * What percentage of your monthly income will you be saving each month?

   I’d need to know these questions to then discuss the advantages and disadvantages of buy downs etc. Here are the rules and secrets you must know to “shop” effectively.

   First, IF IT SEEMS TO GOOD TO BE TRUE, IT PROBABLY IS. But you didn’t really need us to tell you that, did you? Mortgage money and interest rates all come from the same places, and if something sounds really unbelievable, better ask a few more questions and find the hook. Is there a prepayment penalty? If the rate seems incredible, are there extra fees? What is the length of the lock-in? If fees are discounted, is it built into a higher interest rate?

   Second, YOU GET WHAT YOU PAY FOR. If you are looking for the cheapest deal out there, understand that you are placing a hugely important process into the hands of the lowest bidder. Best case, expect very little advice, experience and personal service. Worst case, expect that you may not close at all. All too often, you don’t know until it’s too late that cheapest isn’t BEST. But if you want the cheapest quote – head on out to the Internet, and we wish you good luck. Just remember that if you’ve heard any horror stories from family members, friends or coworkers about missed closing dates, or big surprise changes at the last minute on interest rate or costs…these are often due to working with discount or internet lenders who may have a serious lack of experience. Most importantly, remember that the cheapest rate on the wrong strategy can cost you thousands more in the long run. This is the largest financial transaction most people will make in their lifetime. That being said – we are not the cheapest. Of course our rates and costs are very competitive, but we have also invested in the systems and team we need to ensure the top quality experience that you deserve.

   Third, MAKE CORRECT COMPARISONS. When looking at estimates, don’t simply look at the bottom line. You absolutely must compare lender fees to lender fees, as these are the only ones that the lender controls. And make sure lender fees are not “hidden” down amongst the title or state fees. A lender is responsible for quoting other fees involved with a mortgage loan, but since they are third party fees – they are often under-quoted up front by a lender to make their bottom line appear lower, since they know that many consumers are not educated to NOT simply look at the bottom line! APR? Easily manipulated as well, and worthless as a tool of comparison.

   Fourth, UNDERSTAND THAT INTEREST RATES AND CLOSING COSTS GO HAND IN HAND. This means that you can have any interest rate that you want – but you may pay more in costs if the rate is lower than the norm. On the other hand, you can pay discounted fees, reduced fees, or even no fees at all – but understand that this comes at the expense of a higher interest rate. Either of these balances might be right for you, or perhaps somewhere in between. It all depends on what your financial goals are. A professional lender will be able to offer the best advice and options in terms of the balance between interest rate and closing costs that correctly fits your personal goals.

   Fifth, UNDERSTAND THAT INTEREST RATES CAN CHANGE DAILY, EVEN HOURLY. This means that if you are comparing lender rates and fees – this is a moving target on an hourly basis. For example, if you have two lenders that you just can’t decide between and want a quote from each – you must get this quote at the exact same time on the exact same day with the exact same terms or it will not be an accurate comparison. You also must know the length of the lock you are looking for, since longer rate locks typically have slightly higher rates.

   Again, our advice to you is to be smart. Ask questions. Get answers.

   As you can imagine, we wouldn’t be encouraging you to shop around if we weren’t pretty confident that we feel that we can give you a great value and serve you the very best.

   Please call us with any further questions you may have at this time – we are ready to work for your best interest