Lender’s Effective Yield

A lender’s effective yield is the real interest rate the lender earns after including discount points paid upfront. Even if the loan says one interest rate, the lender actually earns more because of the extra money paid at the beginning.Each discount point increases the lender’s return by about 0.125%. This is the same as ⅛ of 1%. To make the math easier, lenders use decimals.The formulas: Discount points × 0.125 = increase in yieldStated interest rate + increase in yield = effective yieldExampleLoan amount: $540,000 Interest rate: 6% Discount points: 2 pointsStep 1: Find the increase in yield2 × 0.125 = 0.25%So, the 2 discount points increase the lender’s yield by 0.25%.Step 2: Add it to the interest rate6% + 0.25% = 6.25%The lender’s effective yield is 6.25%This means the lender earns more than 6%, even though the loan is advertised at 6%.