Tuesday, March 17, 2009

What's the Difference Between the Loan Origination Fee and the Discount Fee?

One of the most common questions we are asked is what is the difference between the loan origination fee and the loan discount fee. Here's the answer:

The loan origination fee is profit for the mortgage broker. 100% profit. If you're using a retail lender, then it's 100% profit for the lender. Don't let anyone tell you differently.

The loan discount fee is a fee that the lender charges the mortgage broker to get a lower interest rate than the "par" rate. The par rate is the lowest interest rate that does not cost the broker any money if he locks the loan at that rate. If the borrower wants a lower interest rate than the par rate, then it costs the broker some money to lock the loan at the lower rate, and the broker will pass that fee onto the borrower. This is known as "buying down the rate" and the fee is typically known as "paying points". The lender is basically saying, sure, you can have a lower rate, but it's going to cost you X amount to get that rate.

One thing to keep in mind is that the discount fee is rarely (if ever) a nice round number, such as 1%, 1.5%, 2%, etc. The discount fee is actually a number that is carried out to 3 decimal places, such as .438% or .189%, or some other odd number like that. If a broker or banker ever tells you that the discount fee is 1%, 1.5%, 2%, etc., that means he is pocketing the difference between the actual discount fee and the fee he is charging.

Shame on him.

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