and the pledge was “dead” to the lender after the loan was repaid. For centuries, it’s
been figured out using mathematics.What mathematical conceptis used to calculate mortgage payments?
In most cases, a mortgage is based on amortization, which is the gradual elimination
of a liability (a financial obligation or debt, such as a mortgage) in regular, fixed, sys-
tematic payments (such as monthly) over a specific period of time. These payments
must be enough to cover both the principal borrowed and the interest. Although it is
usually written in a complex set of mathematical calculations, simply put amortiza-
tion means a part of the payment goes toward the interest cost and the remainder
goes toward the principal (or the amount borrowed). The interest is then recomputed
414 on the amount owed, and therefore it gets smaller and smaller as the ending balance
How are “points” determined in a real estate transaction?
W
hen buying a home through a real estate group or bank, “points” may be
paid by the borrower at the time a loan is made. This is usually to get a
lower interest rate, because the lender often offers certain rate/point combina-
tions that may help the homeowner save money. Actually, points usually refer to
the commission charged by the mortgage broker or the loan fee charged by the
lender when the loan is made. Points can be also negative, in which case they are
called “rebates” from the lender to the borrower and are often used by borrowers
to defray other settlement costs.
In general, each point is one percent of the loan amount. For instance, three
points would be equal to three percent of the total loan amount. There is no set
number of points offered by a lender, as it is not controlled by any laws. For
example, on a $100,000 loan, one point is equal to $1,000; 10 points is equal to
$10,000. A homeowner looking for a loan should try to find a mortgage broker
or lender that charges fewer points. Some financial institutions might even be
willing to negotiate for lower points. But beware of lenders offering no or zero
points, because they usually charge much higher interest rates than those offer-
ing loans with points.
Although it is a matter of mathematics and a person’s budget, there are some
very general guidelines when choosing a mortgage. Low-rate, high-point loans
are usually used by borrowers who can meet the down-payment cash require-
ment and either want to stay in a house a long time or want to reduce their
monthly mortgage payments. High-rate, low-point combinations are for borrow-
ers who don’t expect to be in their houses very long, or who are short on cash.