Understanding Loan Points: A Guide for Arizona Real Estate Students

A lending institution will lend 70% of the sales price. The interest rate is 6% with 8 points. What is the cost of points for the loan if the sales price is $160,000?

• A. $3,840
• B. $5,376
• C. $8,960
• D. $12,800

Answer: (C)

To determine the cost of points for the loan, it’s essential to first understand what "points" are and how they are calculated. Points are fees paid to the lender at closing, and one point is equivalent to 1% of the loan amount. In this scenario, the lending institution offers to lend 70% of the sales price, which is $160,000. To calculate the loan amount, you would multiply the sales price by 70%. Calculating this: 0.70 x $160,000 = $112,000 Now, with the loan amount established at $112,000, we can calculate the cost of the 8 points being charged. Since one point is equal to 1% of the loan amount, the calculation for points is as follows: 8 points = 8% of the loan amount Calculating the cost of points: 0.08 x $112,000 = $8,960 This results in a total point cost of $8,960. This figure represents the upfront cost the borrower would pay to secure the loan, reflecting the lender’s fees associated with processing and agreeing to the loan terms at the specified interest rate. Understanding how to calculate the loan amount and the associated costs

When you’re preparing for the Arizona Real Estate License exam, one of the key concepts you'll need to wrap your head around is loan points. What are points, anyway? They’re essentially fees you pay to a lender to lower the interest rate on your mortgage. It’s like putting a bit of money upfront to save over the long haul — everyone loves a little upfront investment that pays off later, right?

Let’s break this down with an example that might come up on your exam.

Imagine a lending institution is willing to offer 70% of a property’s sales price — let’s say that sales price is $160,000. So, what’s 70% of that? You can just whip out your calculator for this one or do some quick mental math. Multiplying $160,000 by 0.70 gives you $112,000. Voilà! That’s your loan amount.

Now, here’s where points come into play. In this situation, the lender is charging 8 points. One point equals 1% of your loan amount. So, to find out how much you’ll owe in points, you’ll take that loan amount and multiply it by 8% (or simply 0.08). Here's the math:

0.08 x $112,000 = $8,960

What does that mean for you? It means you’ll be paying $8,960 upfront to secure the loan at that interest rate. It’s essential to know not only the amount but also how that money impacts your overall financing strategy.

You might be thinking, "But why would I pay points?" Good question! Paying for points can actually save you money in the long run, especially if you plan on staying in your home for an extended period. Lowering your interest rate pays dividends over time, making your monthly payments more manageable. So, keep that in your back pocket as you study!

Here’s the thing: understanding the ins and outs of financing doesn’t just help you ace the Arizona real estate exam; it equips you with critical skills for your future career. From calculating the real cost of homeownership to explaining financing options clearly to potential buyers, it sets the stage for successful transactions.

And let's not forget how this knowledge builds trust with your clients. When you can confidently guide someone through their choices and explain the costs associated with obtaining a home loan, you're not just a sales agent; you're a trusted advisor.

So next time you're brushing up on your exam prep, remember this example. Points, percentages, and a little bit of math can lead to a big reward. Happy studying, and may you ace your Arizona Real Estate License exam!