Why Lenders Charge Points

Why do lenders charge an upfront fee called points? Because they can…is what most would like to believe. In reality it is to pay for the upfront work done to issue the loan. All the work necessary before the closing; from taking in the lead, to sending the funds. Someone takes in the application, reviews the loan request, collects the necessary documents and information, underwrites the loan (does the due diligence on the loan), and moves the funds. Not to mention the cost of office space, utilities, salaries, and other overhead.

With a high enough loan amount, a high enough interest rate, high enough cash reserves, and a prior relationship with the borrower (that’s a lot of pre-requisites) some lenders may be willing to add the points to the loan, to receive that compensation over the duration of the loan, or to waive them completely. For the borrower this arrangement lowers the entry amount while increasing the monthly payment. For the lender it increases the total earn, but delays being paid for work done. Not so good for the lender as it delays being paid for work already done, and in case of a default they are also faced with the added risk of losing compensation for that already done work.

Why do lenders charge points? To pay for the work of processing and issuing the loan.