For each 1.5 points the buyer
pays at closing, the yield of the loan is increased
by about 1/4 of 1% over the life of the loan.
One point is one percent of the new loan amount,
not sales price.
An "Origination Fee" is a charge by
the lender "to process your loan".
The "Origination Fee" is calculated
exactly as points are calculated.
The purchaser (if he has a fixed rate loan)
will always pay the same interest rate during
his 30 year loan. (The principal and interest
payment always remains the same during the life
of the loan)
Let's pretend that today's interest rates are
around 6.75%. The 6.75% is the "interest
rate of the loan" and it will remain the
same interest rate during the entire term of
Many times people don't understand why the "Truth
in Lending Statement" from their lender
says they are paying an interest rate of 7.75%
rather than the 6.75% they were promised!
The 7.75% interest rate is the "A.P.R."
of the loan. "A.P.R." means "Annual
Percentage Rate". The A.P.R. is determined
by adding two things together.
The first ingredient is the "Interest Rate"
of the loan. In our above example the interest
rate is 6.75%.
The second ingredient is the fees you are charged
"up front" from the bank to obtain
your loan. These "up front" fees include
"points", "origination fees",
"processing fees", etc.
When you combine the interest rate plus the
miscellaneous fees paid "up front"
the additional fees make the true interest rate
you are paying higher than the basic interest
rate of the loan.
As an example: You agree to pay one point origination
fee to your lender to process your loan. In
addition, you agree to pay two discount points
to reduce your interest rate.
SALES PRICE $100,000
LOAN AMOUNT $95,000
DOWN PAYMENT $5,000
The cost of the origination fee in the above
example is $950.00
The cost of the two points in the above example
In General one and a half points equals approximately
1/4 of one percent increase in the interest
rate yield over a thirty year period.
As an example: 7% PLUS 1.5 POINTS EQUALS A 7
1/4% LOAN WITH NO POINTS
Normally, I advise my clients to pay a slightly
higher interest rate and pay lower points.
As an example: If you paid 1.5 points on a $100,000
loan, you would pay $1,500.00 at closing in
order to reduce your interest rate by 1/4 of
When you consider 1% of $100,000 is $1,000 in
interest, the 1/4 of 1% would equal about $250.00
in annual interest payments, or about $20.00
If you save $20.00 per month in payments, it
would take you about 75 months to save the $1,500
you paid to buy your interest rate down!
It takes about 7 years of payments to recover
the amount you saved by paying points up front!
The average loan is paid off in about 8 years!
Most people don't stay in their home long enough
to reap the benefits!
TAKE THE MONEY YOU SAVE BY REDUCING YOUR CLOSING
COSTS (NOT PAYING ANY POINTS) AND PAY OFF HIGH
INTEREST RATE CREDIT CARDS, STUDENT LOANS OR
AUTO LOANS. YOU WILL FIND YOUR OVERALL PAYMENTS
WILL DROP SIGNIFICANTLY!
YOU CALL A LOAN OFFICER AND HE QUOTES YOU THE
WE ARE AT 6 3/4% 1 + 3 What does this mean?
This means we are at an interest rate of 6 3/4%
with one percent origination fee and three points.
A SECOND LOAN OFFICER QUOTES YOU 7% 1 + 0.
This means we are at an interest rate of 7%
with one percent origination fee and no points
WHICH IS THE BETTER RATE?