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Understanding Loan Points and Their Cash Value in Mortgage Calculations

This chapter provides a comprehensive analysis of loan points and their cash value, illustrating how points affect loan amounts and interest rates. Two scenarios are presented: the cash value of points on loans for purchasing properties and the adjusted rate of interest when points are charged. The calculations include interest on various loan amounts and the impact of origination fees. Additionally, it covers the PITI (Principal, Interest, Taxes, Insurance) payment calculation, ensuring clarity in the overall cost of borrowing.

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Understanding Loan Points and Their Cash Value in Mortgage Calculations

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  1. Chapter 3 Math Problems- Loan Points

  2. Cash value of Points • You get a loan for $36,000 at 9% and the lender is charging 1 point. 36,000 x .01 = $360 (cash value of 1 point) • You get the same loan and the lender is charging 3 points. 36,000 x .03 = $1080 (cash value of 3 points)

  3. Cash value of points on a sliding scale loan • Sales price of a house is $142,000. The bank will lend 97% on the first $25,000 and 95% of the balance at 8.5% interest. Origination fee is 3 ½ points. What is the cash value of the points?

  4. Solution 1. find the amount over 25,000 $142,000 - $25,000 = $117,000 2. Find the loan amount 97% of $25,000 = $24,250 95% of $117,000 = $111,150 Total loan amount = $135,400 3. $135,400 x .035 = $4,739 (cash value of 3 ½ pts)

  5. Point value to increase lender’s return • The bank loans $48,000 at 9% plus 5 points. What is the lender’s adjusted rate of interest including the points?

  6. Solution • Multiply the 5 points by 1/8 % increase in interest. 5 x 1/8 % = 5/8% • Add the increase return of 5/8 to 9% interest • The adjusted rate of return is 9 5/8% * 1/8 = .125

  7. Problem • You purchase a home for $152,000. The bank lends 80% at 8 ¾% plus 6 points. What is the cash value of the points?

  8. Solution • $152,000 x 80% = $121,600 $121,600 x .06 = $7296 cash value of points • What is the adjusted yield? .125 x 6 points = .75 Add to 8 ¾ % = 9.5 % is the true yield

  9. PITI payments Monthly principle and interest is $826.42. Annual property taxes are $993.24, annual insurance is $244.32. What is the monthly PITI payment

  10. Solution to PITI Annual taxes: 993.24 /12 = $82.77 monthly Annual insurance: $244.32 /12= $12.36 monthly PI= 826.42 Taxes = 82.77 Ins = 20.36 Total monthly PITI = $929.55

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