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Question:
A buyer enters into a purchase agreement with a seller conditioned on the buyer obtaining loan financing. The buyer contacts a lender who agrees to fund the loan. The buyer pays multiple points upfront to the lender. What does this do to the note rate on the mortgage?
A
The note rate will decrease and the principal amount will remain the same.
explanation
Points are a fee charged by a mortgage lender as prepaid interest. Payment of a point causes a reduction in the note rate on the mortgage. However, the payment of a point will have no effect on the principal balance of a mortgage. A point equals 1% of the amount of the mortgage.
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