Fees, Rates, and the APR Trick

Lenders bundle rates and points differently to confuse comparison shopping. A "6.5% with 2 points" is not cheaper than "7.0% with 0 points" just because 6.5% is lower. APR is supposed to solve this, but APR doesn't work for short holds. True cost calculation requires knowing your actual hold period.

Key takeaways

• Mortgage points are an upfront fee paid at closing to "buy down" the rate; 1 point = 1% of loan amount, typically reduces rate by 0.25%
• Different rate-and-point combos on the same loan produce different APRs; the APR formula amortizes points over 30 years, hiding the true 5-10 year cost
• A 0-point loan costs less if held 5 years; a 2-point loan costs less if held 30 years
• For investment property, most investors hold 5–10 years, making low-point structures cheaper despite higher stated rates
• Calculating true cost requires: (interest for X years) + (upfront points) - (any savings), compared side-by-side

What Are Points?

A "point" is 1% of the loan amount paid upfront to reduce the interest rate. On a $750k loan:

• 1 point = $7,500 (paid at closing)
• 2 points = $15,000 (paid at closing)
• 0.5 points = $3,750 (paid at closing)

Paying points is optional. The lender offers a menu:

Rate	Points Cost	APR
7.0%	0 points ($0)	7.0%
6.75%	1 point ($7,500)	6.88%
6.5%	2 points ($15,000)	6.76%
6.25%	3 points ($22,500)	6.64%

Why would you pay $15,000 upfront to reduce a rate from 7.0% to 6.5%? Because the interest savings over the loan's life exceed the upfront cost.

On a $750k loan amortized 30 years:

Rate	30-Year Total Interest
7.0%	$1,131,350
6.5%	$975,550
Savings over 30 years	$155,800

Paying 2 points ($15,000) to save $155,800 in interest over 30 years is a win. The payback period is 30 years ÷ 30 = 1 year (the 30-year calculation is baked into the math, but the intuition is that the savings far exceed the cost).

More precisely: 2 points cost $15,000; the annual interest savings is $155,800 ÷ 30 = $5,193/year. Payback is $15,000 ÷ $5,193 = 2.9 years.

The Payback Period and Hold Period Mismatch

The critical insight: points make sense only if you hold long enough to recoup the upfront cost.

On a $750k loan, 7.0% vs. 6.5%:

Year 1:

• 7.0% interest: $52,500
• 6.5% interest: $48,750
• Annual savings: $3,750
• Upfront cost (2 points): $15,000
• Cumulative savings: -$15,000 + $3,750 = -$11,250 (you're still negative)

Year 2:

• Cumulative savings: -$11,250 + $3,750 = -$7,500 (still negative)

Year 3:

• Cumulative savings: -$7,500 + $3,750 = -$3,750 (still negative)

Year 4:

• Cumulative savings: -$3,750 + $3,750 = $0 (break-even)

Year 5:

• Cumulative savings: $0 + $3,750 = $3,750 (now positive)

Payback period: ~3.9 years

If you hold 5 years, paying 2 points ($15k) at 6.5% saves $3,750/year, or $18,750 total over 5 years. Net savings: $18,750 - $15,000 = $3,750. It's profitable.

If you hold 3 years, the cumulative interest savings is only $11,250 (3 years × $3,750). After paying $15,000 in points, you're negative $3,750. It's a loss.

If you hold 10 years, cumulative savings is $37,500, minus $15,000 points = $22,500 net savings.

APR and Its Limitations

APR (annual percentage rate) is supposed to standardize the rate-and-points comparison. The formula spreads the upfront points across the loan's amortization period (usually 30 years) and expresses the result as an equivalent annual rate.

On a $750k loan, 6.5% with 2 points:

APR = 6.5% (the base rate) + ($15,000 points ÷ $750,000 loan) ÷ 30 years = 6.5% + 0.067% = 6.567% ≈ 6.57% APR

Compare to 7.0% with 0 points:

APR = 7.0% (the base rate) + $0 ÷ 30 years = 7.0% APR

The 6.5% / 2-point loan has a lower APR (6.57% vs. 7.0%), so regulators say, "This is the cheaper loan." But that's only true if you hold 30 years.

For a 5-year hold:

6.5% + 2 points:

• Interest cost (5 years): $48,750 × 5 = $243,750
• Upfront points: $15,000
• Total cost: $258,750

7.0% + 0 points:

• Interest cost (5 years): $52,500 × 5 = $262,500
• Upfront points: $0
• Total cost: $262,500

Difference: $3,750 (6.5% + 2 points is cheaper by $3,750 over 5 years)

So the 6.5% + 2-point loan is indeed cheaper. But the APR difference (6.57% vs. 7.0%) grossly overstates the benefit. The APR implies a 0.43% annual advantage; the true 5-year advantage is only $3,750 ÷ 5 = $750/year (0.1% of the loan), not 0.43%.

Rate-and-Point Combos: Comparing the Menus

Lenders offer different rate-and-point combinations. Here's a realistic menu for a $750k investment property loan:

Scenario	Rate	Points	Upfront Cost	5-Year Total Interest	Total 5-Year Cost	10-Year Total Interest	Total 10-Year Cost
A	7.0%	0	$0	$262,500	$262,500	$525,000	$525,000
B	6.75%	1	$7,500	$248,438	$255,938	$496,875	$504,375
C	6.5%	2	$15,000	$243,750	$258,750	$487,500	$502,500
D	6.25%	3	$22,500	$234,375	$256,875	$468,750	$491,250

For a 5-year hold:

• Cheapest: D (6.25% + 3 points) at $256,875 total cost
• Second: C (6.5% + 2 points) at $258,750
• Third: B (6.75% + 1 point) at $255,938
• Most expensive: A (7.0% + 0 points) at $262,500

Winner: Scenario B at $255,938.

For a 10-year hold:

• Cheapest: D (6.25% + 3 points) at $491,250
• Second: C (6.5% + 2 points) at $502,500
• Third: B (6.75% + 1 point) at $504,375
• Most expensive: A (7.0% + 0 points) at $525,000

Winner: Scenario D at $491,250.

Notice: The best choice changes based on hold period. For 5 years, pay 1 point. For 10 years, pay 3 points.

Real-World Example: Two Lenders, Same Loan

Lender X quotes: "6.5% with 0 points, APR 6.52%" Lender Y quotes: "6.25% with 1.5 points, APR 6.48%"

On the surface, Lender Y looks cheaper (6.48% APR < 6.52%). But let's calculate actual cost:

On a $750k loan, 7-year hold:

Lender X (6.5% + 0 points):

• 7-year interest: $48,750 × 7 = $341,250
• Points: $0
• Total: $341,250

Lender Y (6.25% + 1.5 points):

• Upfront cost: 1.5 × $7,500 = $11,250
• 7-year interest: $46,875 × 7 = $328,125
• Total: $339,375

Difference: Lender Y saves $1,875 over 7 years ($268/year)

The APR difference (0.04%) maps to $1,875 over 7 years, which is accurate. In this case, the lower APR actually corresponds to lower total cost.

But now assume a 3-year hold:

Lender X (6.5% + 0 points):

• 3-year interest: $48,750 × 3 = $146,250
• Points: $0
• Total: $146,250

Lender Y (6.25% + 1.5 points):

• Upfront cost: $11,250
• 3-year interest: $46,875 × 3 = $140,625
• Total: $151,875

Difference: Lender X is actually $5,625 cheaper over 3 years.

In this scenario, despite having the higher APR, Lender X is the cheaper loan.

Calculating True Cost: The Framework

For any rate-and-point comparison:

1. Identify the candidates:

   • Lender A: Rate X%, Z points
   • Lender B: Rate Y%, W points

2. Know your hold period: 5 years, 10 years, etc.

3. Calculate interest per year: For each candidate, monthly payment × 12 × (principal balance trend)

   Simplification: Annual interest ≈ Loan balance × Rate. (More precisely, monthly interest is slightly different each month as principal declines, but for rough comparison, annual interest ≈ average balance × rate.)

4. Multiply interest by hold years: Interest per year × hold period

5. Add upfront points to interest cost: Total cost = (Interest for X years) + (Points paid at closing)

6. Compare: Lowest total cost wins.

Example: $750k loan, 6-year hold.

Candidate A: 6.75% + 1 point

• Upfront cost: $7,500
• Annual interest: $750,000 × 6.75% = $50,625/year
• 6-year interest: $50,625 × 6 = $303,750
• Total cost: $7,500 + $303,750 = $311,250

Candidate B: 6.5% + 2 points

• Upfront cost: $15,000
• Annual interest: $750,000 × 6.5% = $48,750/year
• 6-year interest: $48,750 × 6 = $292,500
• Total cost: $15,000 + $292,500 = $307,500

Winner: Candidate B saves $3,750 over 6 years.

When to Pay Points and When Not To

Pay points (buy-down the rate) if:

• You're holding 5+ years
• The payback period is shorter than your hold period
• You have cash at closing to pay the points (don't roll points into the loan, that defeats the purpose)
• You're confident you won't refinance or sell early

Don't pay points if:

• You're holding 3 years or less (payback period is too long)
• You have capital constraints and prefer to preserve cash at closing
• You plan to refinance in 3–5 years when rates fall (paying points now is wasted if you refi before payback)
• You're uncertain about your hold period

Comparison table: 7.0% + 0pts vs. 6.5% + 2pts

Related concepts

• Loan Shopping: The LE Comparison

Next

Understanding true cost across your actual hold period unlocks smarter financing decisions. But most individual investors stop there, comparing loans in isolation. The final article pulls everything together: a decision framework for matching loan type to investment strategy. A fix-and-flip has different financing needs than a long-hold rental. A value-add play needs different leverage than a stabilized property. Choosing the right loan type—and the right lender—is the capstone decision.