What is the Lender's yield on a conventional loan if they charged 5% interest and 3 points?

To calculate the lender's yield on a conventional loan when the lender charges an interest rate and points, you need to take into account both the interest the borrower pays and the upfront costs represented by the points. In this case, the lender charges 5% interest and 3 points.

Points are a form of prepaid interest, where each point equals 1% of the loan amount. Therefore, if 3 points are charged, that represents an additional charge of 3% of the loan amount. This means the effective return on the loan to the lender is higher than just the interest rate alone.

To find the lender's yield, you can use a formula that adjusts the nominal interest rate based on the points charged. The yield can be approximated using the following general method:

1. Take the nominal interest rate (5%).

2. Add the points to the interest rate in terms of yield. Since 3 points represents an additional 3% cost, you can think of this as being an interest rate equivalent.

3. The points get annualized over the life of the loan to adjust the yield upwards.

Summing these adjustments, the estimated yield would be higher than the nominal rate. In calculating the lender's yield when adjusting for the