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

By
Mortgage and Lending with The Mortgage Experts at America's Mortgage, a Division of Cherry Creek Mortgage Co. NMLS #241555

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.

Comments (8)

Anonymous
Ralph

I have GFE of 405,000 FHA loan at 6%. I have two co-signers, one with a credit score of low to mid 600 due to a bankruptcy, the other co-signer and myself have a score of about 800. My loan origination fee is 1% and my loan discount fee is 1%. MY loan officer said that the loan discount fee is not to buy down my rate, she said it is a fee from the lender because the co-signer with the 600 range credit score is a liability. Can this be true or is the loan officer pocketing the money.

Aug 31, 2009 09:34 AM
#1
Chris Thomas
The Mortgage Experts at America's Mortgage, a Division of Cherry Creek Mortgage Co. - Denver, CO

Ralph -- The interest rate will definitely be higher because the credit score of one of the borrowers is low.  The lowest score is the one that is used.  The industry term for that is the "representative credit score".

However, the loan officer is making a ton of money on this deal AND she's lying to you about what a discount point is.  Discount points are ALWAYS supposed to be used to buy the rate down.  In this case, the 1% "discount point" is not being used to buy the rate down, so it is not supposed to be called a discount point.  Calling it a discount point is a way that many loan officers fool their clients.

The par interest rate for a 30-day lock on an FHA loan today with a 600 credit score is 5.25%.  The par rate is the rate that does not pay the broker any rebate.  A rate of 6% is paying the broker a rebate of 2.35%.  Add to that the 1% origination fee and the phony "discount point" of 1% and the broker is making about 4.35% of the loan amount as profit.  On a 405K loan, that is about $17,600.

You are being ripped-off.

I am not saying that you should only be paying 1% origination fee and getting a rate of 5.25%.  I would think 1% origination and a rate of 5.5% would be fair (with NO discount point).  The broker would still make about 2.25% in profit (1% from the origination fee and about 1.25% from the rebate she will get for jacking the rate up above the par rate.  That is a little over $9,000 profit for her and a very good rate for you, plus you would not be paying any phony charges.

Aug 31, 2009 10:10 AM
Anonymous
Ralph

Thank you so much for responding. I forgot to mention that im putting down 10%. And my question is, Im close to the end of Escrow so how would i address this to my loan officer so she can change it or is there any documents that she can show me other than GFE were i can prove the phony charges since it is an FHA loan.

Aug 31, 2009 12:51 PM
#3
Chris Thomas
The Mortgage Experts at America's Mortgage, a Division of Cherry Creek Mortgage Co. - Denver, CO

Ralph -- Tell her that you know about RESPA (the Real Estate Settlement Procedures Act), which is the federal law that governs who gets paid and how we all get paid.  She is breaking the law by telling you the 1% discount point is not being used to lower the rate.  FHA is extremely clear on how discount points are to be used - they can ONLY be used to buy the rate down.

In January 2010, a new law goes into effect.  It's called the S.A.F.E. Act (Secure and Fair Enforcement for Mortgage Licensing Act) and it creates a nationwide database of all the loan originators in the country.  If you lose your license in one state, you can't get a license in any other state.  You are effectively banned from the profession.  Tell her you will report her to the state because she is breaking the law, and you will report her to HUD because she is breaking the law.

She will back down, unless she is an idiot and doesn't care about losing her license and trying to get a job in another profession.

One very important thing to remember is that you are totally in control.  Everyone gets paid because you are buying a house.  The lender, the seller, the realtors, the title company - everyone gets paid ONLY if you close the deal.  To make a mortgage deal official, you have to sign all the papers.  Signing the loan application does not obligate you to anything - you can always get out of the deal by not signing the papers.

You do run the risk of losing your earnest money, but I'm telling you, no one is going to allow that to happen.  The realtors and the loan officer don't get paid anything if you lose your earnest money - that goes to the seller.  When the realtors see that they are not going to get paid, they will put so much pressure on the loan officer, she will change the fees.  She is not going to go broke by changing the fees, either.  She just won't be making 17K.  Too bad she's only going to be making 9K.

You're dealing with a crook here, so don't back down.

Sep 01, 2009 02:28 AM
Anonymous
Judy

I am in the process of closing on our refinance. The refinance is a loan for $198,000 with an origination fee of 1% of $2,055 and discount point of .5% or 1,027.50.  I'm aslo being charged a fee of $695 for processing fee and $725 for an underwriting fee. Aren't these fees already included in the origination fee?  I'm being told by the broker that there is a new law he just found out about for us to sign off on a broker fee agreement form of how much we are paying them for their services.  The form was sent blank, so I told him that I'm not going to sign a blank form and he told him to just put the $695 in processsing fee, as this is the only fee we are paying them to broker the deal.  Is all of this true or is he just trying to have me pay him extra?

 

Thanks!

Judy

Mar 19, 2010 03:07 AM
#5
Chris Thomas
The Mortgage Experts at America's Mortgage, a Division of Cherry Creek Mortgage Co. - Denver, CO

Judy -- Within 3 days of giving the broker the information necessary to complete the application, he is required to send you a Good Faith Estimate (GFE).  Look at page 2.  Line 1 is called "our origination charge", and it includes the processing fee and the underwriting fee.  On line 2, it will show the discount point.  Line "A" will then be the total of those two numbers.

If the broker is not using this form, he is breaking the law.  If he has not given it to you within 3 days of taking the application, he is breaking the law.  If he tells you there is another form that adds fees to these numbers, he is breaking the law.  If he changes these numbers before the closing, he is breaking the law.

If he just found out about this form, he is unbelievably incompetent.  This form has been required since January 1, 2010.  If this is the first loan he has done since January 1, you really need to find someone else who is a little bit busier and knows how to do his job correctly.

Based on what you are telling me, you should dump this guy.  If you listen to excuses from him and use him anyway, then you are probably going to be ripped off. 

Chris

 

Mar 19, 2010 03:40 AM
Anonymous
jen wong

I am going to build a customery house. My husband is working with good credit and I don't have a job with poor credit. Should I just borrow the loan in his name only  or what should I watch out when I borrow the loan ?

the discount fee is to buy a lower rate and how do I know what is the current par rate ?

 

 

Jan 26, 2012 01:20 AM
#7
Chris Thomas
The Mortgage Experts at America's Mortgage, a Division of Cherry Creek Mortgage Co. - Denver, CO

If you don't have any income, then there is no reason to use your credit. 

There's really no simple way to know what the par rate is because you do not have access to the rate sheets that the lenders use.  I would call a few of the major lenders and see what they are charging.  If they are charging 1% in origination fee, then that is probably the par rate.

Feb 07, 2012 03:26 AM

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