Understanding Mortgage Points: What You Need to Know

How much will a borrower pay for 1 point on a mortgage loan of $215,000 to secure a preferred interest rate?

• A. $215
• B. $2,150
• C. $21,500
• D. $215,000

Answer: (B)

A borrower will pay $2,150 for 1 point on a mortgage loan of $215,000 to secure a preferred interest rate. Points are considered prepaid interest and equal 1% of the loan amount. Therefore, option A is incorrect as it is only 1% of the loan amount, not the full loan amount. Option C is incorrect as it is 10% of the loan amount, which would be considered a very high rate for a point. Option D is incorrect as it is the full loan amount and would not be worth it for just 1 point. So, the only logical answer is option B, which is 1% of the loan amount and therefore, the amount a borrower would pay for 1 point to secure the preferred interest rate.

So you’re gearing up for the California Real Estate Exam, and you stumble upon a question about mortgage points. It seems straightforward enough, but let’s dive into it! Picture this: you’ve got a mortgage loan of $215,000 and you want to secure a lower interest rate. What’s the cost to make that happen with one point?

What are Points Anyway?

You might be wondering, what exactly are these points everyone’s talking about? Mortgage points are essentially a form of prepaid interest. Yep, that’s right! When you pay points up front, you essentially lower your interest rate over the life of the loan. One point equals 1% of the entire loan amount. This means, if you’re looking to secure a preferred rate on a $215,000 loan, you’re looking at a payment of $2,150 for that one point. Sounds simple, right?

Breaking Down the Options

Now, let’s unpack the options you might see on an exam question regarding this.

• A. $215: Nope, this is just 0.1% of the loan amount. Not even close.

• B. $2,150: Bingo! This is your 1% of $215,000.

• C. $21,500: That’s a staggering 10% of the loan amount—definitely excessive.

• D. $215,000: That’s the total loan amount. Paying that for just 1 point? Not a good deal!

So, the sweet spot here is option B. Paying $2,150 to secure that preferred rate is a savvy move, especially when you consider the potential savings over the life of the loan.

Why Pay Points?

But why go through the hassle of paying points at all? Well, it often boils down to how long you plan to stay in your home. If you’re in it for the long haul, purchasing points can translate into serious savings on interest payments down the line. It’s like investing in your financial future—what’s not to love?

Final Thoughts

As you prep for that exam, keep in mind that understanding terms like mortgage points and their implications on your loans can make a significant difference in everyday life. Beyond the test, you'll want to grasp these concepts for real-world application. The more you know, the smoother your journey in real estate will be!

Stay curious, keep studying, and ace that exam. Here’s to your success in the California Real Estate landscape!