Points & Interest Rates

Points & Interest Rates: Even the most experienced business owners have difficulty understanding the relationship between the interest rate and the points or fees associated with their loans. The reality is that the two are directly related in that "points" are nothing more than interest that is charged up front. The actual rate and number of points a borrower pays is largely dictated by the quality of the borrower’s credit. As the credit quality decreases, the interest rate, points and fees increase. This is because these loans are more difficult to fund and pose a greater risk of default to the lender.

A document called the Truth in Lending Disclosure Statement will show you the Annual Percentage Rate (APR) and other payment information for the loan you have applied for.

The APR takes into account not only the interest rate, but also the points, mortgage broker fees and certain other fees that are associated with your loan. Also, ask if your loan will have a charge or a fee for paying all or part of the loan before payment is due (prepayment penalty).

A lender may require you to obtain certain settlement services, such as a new survey, mortgage insurance or title insurance. It may also order and charge you for other settlement-related services, such as the appraisal or credit report. A lender may also charge other fees, such as fees for loan processing, document preparation, underwriting, flood certification or an application fee. You may wish to ask for an estimate of fees and settlement costs before choosing a lender. Some lenders offer no cost or no point loans but normally cover these fees or costs by charging a higher interest rate.