What is the difference between discount points and origination points?

• A. Discount points increase the interest rate; origination points are lender fees for processing the loan; both paid at closing.
• B. Discount points are taxes paid at closing; origination points are penalties.
• C. Discount points are lender fees for processing; origination points reduce the interest rate.
• D. Discount points reduce the interest rate; origination points are lender fees for processing the loan; both paid at closing.

Answer: (D)

Discount points are prepaid interest you pay at closing to lower the loan’s interest rate. Each point is typically 1% of the loan amount and, in exchange for paying more upfront, you get a lower monthly payment and less interest over the life of the loan.

Origination points are lender fees charged to cover the costs of processing, underwriting, and issuing the loan. They do not automatically reduce the interest rate; they’re essentially a closing cost for obtaining the loan.

Both types are paid at closing, and the distinction matters for financing decisions: points that lower the rate can save money over time, while origination fees simply add to upfront costs without changing the rate.