When your buyer is getting a loan, their lender will ask them whether or not they want to pay points at closing. A point is an upfront payment of interest on the loan. In return for paying points upfront, the lender will offer your buyer a lower interest rate. For example, a lender could offer a choice between 3.75% with 0 points or 3.5% with 2 points. Another advantage of paying for points upfront is that you can immediately deduct them from your taxes.
You’ll need to know a few things in order to solve this real estate math problem:
- One point equates to 1% of the loan amount.
Let’s take an example of the real estate math problem:
ABC Lender offers Mr. and Mrs. Stevens two loan choices for their $200,000, 30-year fixed rate loan. He offers them a lower interest rate if they can pay 1 point upfront at closing. How much additional cash must the Stevens have at closing?
Solution:
The solution to this real estate math problem is:
1 point = 0.1 x Loan Amount
$200,000 x 0.01 = $2,000
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