What are points?

When we sell a loan to an investor, the investor pays us based on the interest rate of the loan. The higher the rate, the more the investor pays.

We can estimate how much revenue we need to earn on each loan to cover overhead, processing fees, salaries, etc. Let's say we need to earn $2000 on each loan. If the investor is willing to pay us $1000 for the loan, we have to make up the difference ($1000) by charging points. Points are always expressed as a percentage of the loan amount and go by several names including origination fee and discount fee. In our example above, on a $100,000 loan, we would need to charge one point to make up the difference.

In order to avoid points, some borrowers prefer to choose a slightly higher interest rate. As I said, the investor will pay us more for a loan with a higher rate. For example, if we raise the interest rate from 4.0% to 4.25%, the investor might pay us an additional $1000. If the borrower is comfortable with the 4.25% rate, the borrower can avoid paying any points.