Loan discount = $4,200; Effective yield = 9 1/4%
*Loan amount = $280,000 (purchase price) - $70,000 (down payment) = $210,000
One point is equal to 1% of the loan in dollars. So, two points is 2% of the loan or: $210,000 x .02 = $4,200 (Loan discount)
For each point charged by the lender, the rate of interest increases approximately 1/8 percent. 2 points x 1/8% = 2/8% or 1/4%
9% (Rate paid by borrower) + 1/4% (Increase due to discount) = 9 1/4% Effective yield. *
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