Let's say our next customer wants a 30 year fixed mortgage at 5.25% for their new home purchase. As most good Loan Officers would, you counsel them that a 5.25% fixed rate is available, but at a steep cost of about three and a half points. They hear but do not heed your advice because they are deadset on a 5.25% fixed rate since it is all over the newspapers.

There are many compelling arguments why not to pay such large up front discount fees, but there is none more compelling than the true or real APR of such a loan that is paid off early.

While precise statistics of this kind are impossible to obtain, the average life of a mortgage still hovers at less than 4 years and that number is still dropping as it has for the past four years.

Assuming no other lender fees the real APR on the above example paid off after four years is 6.4%. If paid off in two years the real APR jumps to 7.5% and if that promotion that involves a move to New Jersey happens in one year, the real APR is a staggering 9.5%. In fact just for this customer to break even versus a 6.125% mortgage with no points takes until the 64th month!