Chapter 1 Math

Question 1

Total Commission

Answer 1

=Sales price X rate of commission

Question 2

Commission Rate

Answer 2

=Commission ÷ Price

Question 3

Property price

Answer 3

=Commission ÷ Commission Rate

Question 4

Percentage of Profit

Answer 4

= Profit ÷ Original cost

Question 5

Profit margin

Answer 5

= Profit ÷ Selling price

Question 6

Interest

Answer 6

$ paid in return for use of money, borrowed at rate of interest for specific time. Borrower repays.

Question 7

Simple interest

Answer 7

$ only for amount of principal borrower owes

Question 8

Interest formula

Answer 8

= principal x rate x time

Question 9

Interest formula example

Answer 9

The interest rate on a $2,250 loan for 1 year at 7 percent interest is $157.50.
=$2,250 x .07 x 1 = $157.50

Question 10

Add on Rate

Answer 10

Interest on total amount of the loan for loan term.
Added to total principal before payments calculated.
Add-on interest almost doubles the simple interest rate.
Calculating interest as a percentage of the original amount of loan (principal), rather than interest on the balance due prior to each payment.
Used for home improvement loans; junior liens.
Borrower pay a higher effective rate of interest each month as the principal balance decreases.

Question 11

AOI Formula

Answer 11

AOI = LA x I x N,

Add-on interest = loan amount x interest rate x number of payments.

1. Calculate AOI.
2. Add the interest amount to the total loan amount.
3. Divide the new total loan amount by the number of payments to get the monthly payment amount.

Question 12

AOI Example

Answer 12

Loan of $2,250 at 7 percent for 1 year.

1. $2,250 loan amount x 7% interest x 1 (number of years);
2. $2,250 + $157.50 = $2,407.50
3. $2,407.50 ÷ 12 = $200.62

Question 13

Add On Interest APR - Effective Rate

Answer 13

APR = 2 x n x I ÷ P(N +1)

APR = 2 x number of payment periods in one year x total financing charges ÷ principal, or amount borrowed x (number of scheduled payments +1)

Question 14

Add on Rate APR Example

Answer 14

Loan of $2,250 at 7 percent for 1 year.
I = 157.50 (total financing charges)

2 x 12 x $157.50 ÷ ($2,250 (12 + 1) = APR
$3,780 ÷ ($2,250 x 13) = APR
$3,780 ÷ $29,250 = 12.9 percent

Question 15

Effective Rate/APR

Answer 15

Nominal 7% interest per loan agreement results in borrower paying an effective rate, or APR of 12.9% .

Question 16

Compound Interest

Answer 16

Computed on the principal amount + accrued interest.

Compound amount = Initial deposit (1 + Interest rate)n

Question 17

Points 2 types

Answer 17

Cost of obtaining a new real estate loan. One-time service charge to the borrower for making the loan.

Prepaid interest, lender charges them to get additional income on loan.

Paid at closing and are usually equal to 1 percent of the loan amount.

Question 18

Origination Points

Answer 18

Two (2) points on a $75,000 loan would be $1,500.

$75,000 x .01 x 2 points

Question 19

Discount Points (optional)

Answer 19

For lender offsets loss when selling the loan to secondary mortgage market. Raises effective interest rate on loan.

1/8 x Discount Points
Add that amount to interest rate

Question 20

LTV Ratio

Answer 20

= (Loan amount ÷ Value)

relationship between a property’s purchase price and its loan amount.

The higher the LTV, the greater loan amount to equity.
Lenders use it as UNDERWRITING STANDARD in QUALIFYING borrowers for loans.
If too high loan, can exceed property value.

Question 21

Loan Amount

Answer 21

=LTV ratio x Property Value

Question 22

Property Value

Answer 22

= Loan Amount ÷ LTV

Question 23

Amortized Loans

Answer 23

Schedule of monthly payments

1. amount of loan
2. term
3. interest rate

Question 24

Income Ratio

Answer 24

LIMIT percent of buyer’s gross income he can spend on housing cost.

Formula = total house payment ÷ gross monthly income.

Conventional loans = less than 28%
FHA = 31% or less

Question 25

Borrower's Debt Ratio

Answer 25

Buyer's monthly debt obligations Formula = total monthly debt ÷ gross monthly income. Conventional loans = 36% or less FHA = 43% or less

Question 26

Area of triangle

Answer 26

½ base x height

Question 27

Price per square foot

Answer 27

=Sales price of home ÷ area Example: A parcel of land that is 150' wide and 100 feet deep and sold for $140,000. 150 X 100 = 15,000 square feet $140,000 ÷ 15,000 = $9.34 per square foot

Question 28

Acre

Answer 28

43,560 square feet

Question 29

Hectare

Answer 29

10,000 square meters or approximately 2.47 acres Example: A parcel of land is 40 acres. 40 ÷ 2.47 = 16.19 hectares

Question 30

Prorating

Answer 30

Expenses divided between seller and buyer. - Taxes - Insurance - Mortgage interest - Utilities

Question 31

Prorating Paid in Advance

Answer 31

Items paid in advance = buyer will owe money to seller Ex: Rent & Insurance Debit to Buyer (buyer pays $), Credit to Seller (seller receives $). EX: Seller paid for insurance for the year and the transaction will close on September 18. The buyer owes seller the portion of the insurance that applies from September 19 to December 31.

Question 32

Prorating Paid in Arrears

Answer 32

Incurred by seller but hasn't paid for them yet. Ex: Taxes & Utilities Debit to Seller (seller owes $), Credit to Buyer Ex buyer receives the sewer bill for the month of September. The charges from September 1-18 belong to the seller, buyer will be paying the bill.

Question 33

The 12 month/30 day method

Answer 33

calculates the amounts due based on a 360-day year and a 30-day month. The steps of this method are as follows. 1. Identify an item and the amount needing to be prorated. 2. Divide by 12 to get the monthly rate. 3. Divide by 30 to get a daily rate. (Day of closing is seller's responsibility) 4. Multiply the monthly rate by the number of months the seller owned the property before closing to get the months-amount due. 5. Multiply the daily rate by the number of days the seller owned the property in the closing month to get the amount due for the closing month. 6. Add the two amounts to get the prorated amount for the seller. 7. Subtract the seller's prorated amount from the starting amount to get the buyer's prorated amount.

Question 34

365-day method

Answer 34

1. Identify an item and the amount needing to be prorated. 2. Divide by 365 to get the daily rate. (Divide by 366 in a leap year.) 3. Multiply the daily rate by the number of days the seller owned the property before closing to get the seller's share. 4. Subtract the seller's prorated amount from the starting amount to get the buyer's prorated amount.

Question 35

Rent example, paid in advance

Answer 35

A closing is set for March 23, and the tenant's rent is $950 per month. The seller owns the day of closing. How much rent credit does the buyer receive using the 365-day method? 1. The number of seller days is 23. 2. The daily rent amount is ($950 ÷ 31) or $30.6452 3. The proration amount is $704.84 ($30.6452 x 23) 4. $950-$704.84 = $245.16. Credit the buyer and debit the seller $245.16.

Question 36

Utility example, paid in arrears

Answer 36

Sellers owes that $, but buyer pays a portion of the seller's bill since bill comes at month end. Power bill $350 in the month of closing, closing is set for February 16th, the seller owns the day of closing, and the 365-day method is used. The proration will be as follows: Seller days = 16 Daily cost = $350 ÷ 28 = $12.50 Total proration amount = $12.50 x 16 days = $200 Debit the seller and credit the buyer $200

Question 37

Buyer's loan interest example

Answer 37

Seller is not related to this transaction. Buyer's new loan is for $200,000 at 5% interest and the day of closing is August 20th. The interest charge will be for the period between closing and the end of the month. If the buyer owns the day of closing, and the method to be used is the 360-day method, how much interest does the buyer owe? The number of buyer days is 11 (remember, count them with your fingers!) Daily interest charge is $200,000 x .05 = $10,000 interest per year $10,000 ÷ 360 = $27.78 interest per day $27.78 daily interest x 11 days = $305.58 interest charge to buyer. CREDIT buyer.

Question 38

Seller's loan interest

Answer 38

Lender provides a payoff number for period between the last full payment and closing date. DEBIT to seller.

Question 39

Debit & Credit reminder

Answer 39

Debit is taken away from someone; credit is given to someone.