How does a loan origination fee differ from a discount point?

• A. A loan origination fee is for processing the loan, while a discount point lowers the interest rate.
• B. A loan origination fee is charged monthly, while a discount point is one-time.
• C. A loan origination fee applies to second mortgages only.
• D. A loan origination fee is non-refundable; discount points are.

Answer: (A)

The distinction between a loan origination fee and discount points is crucial in understanding mortgage costs. A loan origination fee is charged by the lender to cover the costs associated with processing the loan application, underwriting, and preparing the mortgage. This fee reflects the lender's direct costs in setting up the loan.

In contrast, discount points are a form of prepaid interest that the borrower pays at closing to lower the interest rate on the loan. Each point typically costs 1% of the loan amount and reduces the interest rate by a certain percentage, usually around 0.25%. This means that while the loan origination fee is directly for processing the loan, discount points serve to decrease the ongoing cost of borrowing through lower monthly payments over the life of the loan.

The other choices present incorrect interpretations of how these fees function. For instance, the idea that the origination fee is charged monthly or applies only to second mortgages, or that discount points are non-refundable, misconstrues the nature and purpose of these mortgage costs. Understanding this difference is essential for borrowers to make informed decisions about the total costs of their mortgage.