How do we solve real estate math problems involving points? Remember that 1 point costs 1 percent of the loan amount.
In the video below, we work through a typical real estate math question involving points.
The question tells us:
The seller has agreed to pay one and a half points to the mortgage company to help the buyer obtain a mortgage, and the house was listed for $725,000 and it's being sold for $695,000.
Next, we have information about the borrower's down payment. If the buyer will pay 15% in cash and borrow the remaining amount. The seller will owe how much to the lender for points?
So what do we do with this question?
Remember that points are pretty straightforward. A point costs the borrower 1 percent of the loan amount.
Doing The Math...
In this video, they are buying one and a half points. To solve this, first we need to find the loan amount.
The house is listed for $725,000, but the house actually sold for $695,000.
The buyer is putting down a 15 percent down payment,. The rest of the money to purchase the home, therefore, must be borrowed. So 100 percent (the entire amount they need to purchase the home)- 15 percent (the amount they are putting down) = 85 percent needs to be borrowed.
The actual loan amount is $590,750.
The sellers are going to be paying one and a half points for the buyer. So if one point costs 1% of the loan amount, one and a half points costs one and a half percent of the loan amount. So we take the loan amount of $590,750 and we multiply it by 1.5 percent.
This comes up to 1.5%, and it comes up to be $8,861.25. So whether he's paying them for himself, or the seller is paying them on behalf of the buyer, it doesn't matter. The cost is going to be the same for every point that we were asked to pay. It's 1% of the loan amount per point.
Here, since we're paying one and a half points, or 1.5% of the loan amount, the cost is $8,861.25.
When studying points in real estate math, remember that each point costs one percent of the loan amount. Always be careful that you are working with the loan amount, and don't be misled by other numbers presented in the question such as the purchase price!