One point is 1% of the amount borrowed
A point is 1% of the loan amount — the amount of credit extended — never 1% of the sale price. On a $300,000 purchase with a $270,000 loan, 2 points = $270,000 × 0.02 = $5,400. Taking 2% of the $300,000 price gives $6,000, and that substitution of price for loan is the single most common error in this whole topic. One point alone would be $2,700.
Origination fees stack on top of discount points
The loan origination fee is the lender's charge for making the loan and does not reduce the rate; discount points are prepaid interest that buys the rate down. Both are quoted as percentages of the loan, so you simply add the percentages.
Worked example: 1 point origination plus 2 discount points on the same $270,000 loan is 1% + 2% = 3% of $270,000 = $8,100, made up of $2,700 origination plus $5,400 in discount points. Counting only the discount points gives $5,400; counting only the origination fee gives $2,700; applying the combined 3% to the $300,000 sale price gives $9,000.
The 1/8 percent yield rule of thumb
Discount points exist because a lender will accept a below-market note rate if it is paid cash up front to make up the yield. The exam rule of thumb is that one point raises the lender's yield about 1/8 of 1% (0.125%), so eight points move the yield roughly 1%.
Worked example: a lender wants a 7% yield but the borrower's note rate is 6.75%. The gap is 7% − 6.75% = 0.25%, and at 0.125% per point that is 0.25 ÷ 0.125 = 2 points. One point would raise the yield only about 1/8%, to roughly 6.875%; four points doubles what is needed and would move the yield about 1/2%; eight points reflects the separate 1%-of-yield rule and is four times the gap here.