Mortgage Math 2 - Chapter 15 Flashcards
Point
A point is equal to 1% of the loan amount. So if the loan is $500,000, one point would be $5,000 ($500,000 x 1%).
Discount Points
Points used to help the borrower pay to reduce their interest rate.
Here’s An Example:
Let’s say that the borrower has a $100,000 mortgage loan and they qualify for a 4% interest rate on that loan.
They would like a lower monthly payment, and a 3.75% rate would provide a payment that better fits their needs.
To get the rate reduced to 3.75% will cost the borrower $1,000 based on the current value of money in the marketplace.
In mortgage-speak the borrower is paying 1 discount point ($1,000 = 1% of $100,000) to “buy down” their rate from 4% to 3.75%.
Lender Rebate
A lender rebate is when the lender increases the borrower’s interest rate (at the borrower’s request) to cover closing costs.
Par Rate
Zero point rate that has not been modified with discount points or rebates.
Finance Charges
These fees are known as the cost of financing. They include the simple interest, as well as additional fees such as origination charges, discount points and other lender fees.
Annual Percentage Rate (APR).
Finance charges are added together for the full term of the loan, distributed on an annual basis and expressed as a percentage in relation to the loan’s initial principal balance.
Simple Interest Rate Calculation
Principal x Interest Rate x Duration of Loan (in years) = Simple Interest
Annual Percentage Rate Calculation
ALL financing costs ÷ Loan Term ÷ Initial Principal Balance = Annual Percentage Rate
Annual Percentage Rate Example
Assume a lender has a bag with $100,000 in it and the borrower wants to use that $100,000 to buy something. The lender agrees to allow the borrower to use that $100,000 for five years. At the end of the five years the borrower must not only repay the $100,000 to the lender, but also 5% interest for each year of use of the money. They also owe additional finance charges of $3,000.
Simple Interest = Principal x Interest Rate x Duration of Loan (in years)
$100,000 x 5% x 5 = $25,000
APR = All Financing Costs ÷ Loan Term ÷ Initial Principal Balance
$25,000 + $3,000 = $28,000 ÷ 5 ÷ $100,000 = 5.6%
Per Diem Interest
Per Day Interest
Remember, all interest is paid in arrears (or backwards), so if a borrower is paying off their loan on the 15th of June, they must pay for 15 days of interest for those 15 days of June.
Tips for Calculating Per Diem Interest
In the world of calculating interest, there are always 30 days in each month regardless of the number of calendar days. This means that even though there are typically 28 days in February or 31 days in July, we still calculate interest based on 30 days (so if you close your loan in a month with 31 days you actually get a free day of interest - yeah!). This also means that when considering the year and interest, there are 360 days in the year (which makes it easier to calculate because each month is equal).
Per Diem Interest Calculation
Monthly Interest Calculation
Loan Amount x Interest Rate = Annual Interest Annual Interest ÷ 12 = Periodic I/O Payment
Per Diem Interest Calculation
Monthly I/O Payment ÷ 30 = Per Diem Interest
Multiply daily rate by number of days in month until payoff date.
Prorated Taxes
Property taxes are paid annually and, therefore, it’s likely that the buyer and seller will need to split the amount due for the year the sale occurs.
The calculation for accomplishing this is known as proration.
Prorated Tax Calculation
Annual Property Tax ÷ 365 = Daily Property Tax # of Days in Property (this year) x Daily Property Tax = Prorated Taxes
