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About 12 minutes to read, plus a ten-question check in the free course.

Rates, Points & Fees

Q: What are common MLO exam mistakes on rates, points & fees?

Computing points on the purchase price. The fix: Points are a percentage of the LOAN amount. Selling a buydown without the horizon question. The fix: Break-even months versus expected years in the loan decides it — short horizons waste points. Qualifying a 2-1 buydown at the teaser payment. The fix: Qualification runs at the note rate; the subsidy is temporary cash flow, not capacity.

~12 min read · Price the loan: discount points, lender credits, buydowns and per-diem interest.

Loan pricing is a see-saw: pay discount points to buy the rate down, or take lender credits and a higher rate. The exam makes you compute a point's dollar cost, judge a break-even, and price per-diem interest to the day.

Points, credits, and the see-saw

A discount point costs 1% of the loan amount and buys a rate reduction (rule-of-thumb ~0.25%, but whatever the day's pricing grid says). Origination fees/points compensate the lender/broker regardless of rate. Lender credits run the see-saw backward: a premium rate generates a credit that offsets closing costs. Break-even analysis = points paid ÷ monthly payment savings = months to recoup; keep the loan longer than break-even and buying down wins.

1 point = 1% of the LOAN amount (never the price)
Points buy rate down; credits push rate up and costs down
Break-even months = cost ÷ monthly savings

Temporary buydowns and per-diem interest

A temporary buydown (2-1: rate 2% lower year one, 1% lower year two, note rate after) is funded up front — often seller-paid — with the subsidy in escrow; the borrower qualifies at the NOTE rate. Per-diem interest: closings collect interest from the funding date through month's end — daily interest = (loan × rate) ÷ 365 (or 360 per the note), times the day count. Seller concessions cap by program/LTV (conventional 3% at high LTV up to 9%; FHA 6%) — over-cap concessions cut the price/value for LTV.

2-1 buydown: subsidized starter payments, qualify at note rate
Per diem = loan × rate ÷ 365 × days
Seller-concession caps: 3–9% conventional by LTV, 6% FHA

APR sensitivity

Every dollar of prepaid finance charge — points, origination, MI — pushes APR further above the note rate; comparing two offers means comparing APRs at equal lock terms, then sanity-checking with break-even math for the borrower's actual horizon. On the CD, points and credits land in Origination Charges and Lender Credits, feeding the cash-to-close arithmetic the exam also likes to test.

Worked example

Loan $350,000. Offer A: 6.75% with no points. Offer B: 6.25% costing 2 points, saving $115/month. The borrower closes June 21 (funding that day; 30-day June; note computes per diem on a 365 basis at 6.25%) and expects to move in about 5 years. Price both decisions.

Points cost: 2% × 350,000 = $7,000. Break-even: 7,000 ÷ 115 ≈ 61 months — about 5.1 years. His horizon is ~60 months: he leaves right at (slightly before) break-even, so the buydown roughly washes at best; Offer A wins for any earlier exit, and choosing A also preserves $7,000 of cash at closing. Per diem on B: 350,000 × 0.0625 ÷ 365 = $59.93/day; June 21 through June 30 = 10 days → $599.32 collected at closing. The two computations — 1%-per-point cost with break-even months, and daily-interest day-counting — are the exam's bread-and-butter fee math.

Common exam pitfalls

Computing points on the purchase price.

Points are a percentage of the LOAN amount.

Selling a buydown without the horizon question.

Break-even months versus expected years in the loan decides it — short horizons waste points.

Qualifying a 2-1 buydown at the teaser payment.

Qualification runs at the note rate; the subsidy is temporary cash flow, not capacity.

One point, one percent; break-even in months; per diem by the day-count.

Recap

Point = 1% of loan; buys rate per the day's grid
Lender credits: higher rate funds closing costs
Break-even = points ÷ monthly savings; compare to borrower horizon
2-1 buydowns subsidize early years; qualify at note rate
Per diem = loan × rate ÷ 365 × days to month-end
Concession caps: 3–9% conventional, 6% FHA; prepaid charges lift APR

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