To increase a lender's yield by approximately 1%, how many discount points must be charged?

To increase a lender's yield by approximately 1%, how many discount points must be charged?

• A. 4
• B. 6
• C. 8
• D. 10

Answer: (C)

To determine the number of discount points required to increase a lender's yield by approximately 1%, one must understand the relationship between discount points and the yield spread. Generally, an increase of 1% in the yield for a lender can typically be achieved by charging around 8 discount points. Discount points are upfront fees paid to the lender at closing to lower the interest rate on a mortgage or to increase the lender's yield. Each discount point typically represents 1% of the total loan amount. When a borrower pays these points, it effectively increases the lender's return on the mortgage, impacting the yield. Therefore, if a lender wants to increase their yield by 1%, generally, 8 discount points are needed. This practice allows the lender to adjust the pricing of the mortgage for their benefit while providing the borrower the option to either pay points for a lower interest rate or accept a higher rate without points. The amount of 8 points is a commonly accepted figure in the industry for this yield adjustment.

To determine the number of discount points required to increase a lender's yield by approximately 1%, one must understand the relationship between discount points and the yield spread. Generally, an increase of 1% in the yield for a lender can typically be achieved by charging around 8 discount points.

Discount points are upfront fees paid to the lender at closing to lower the interest rate on a mortgage or to increase the lender's yield. Each discount point typically represents 1% of the total loan amount. When a borrower pays these points, it effectively increases the lender's return on the mortgage, impacting the yield.

Therefore, if a lender wants to increase their yield by 1%, generally, 8 discount points are needed. This practice allows the lender to adjust the pricing of the mortgage for their benefit while providing the borrower the option to either pay points for a lower interest rate or accept a higher rate without points. The amount of 8 points is a commonly accepted figure in the industry for this yield adjustment.