[NMLS SAFE] 20, Discount Points Buydowns Per-Diem Interest and APR

Lesson 20 of the free Quibank NMLS SAFE course, and the last of the General Mortgage Knowledge block. Pricing a loan: four charges that all look like the cost of money, separated by one question — does this charge move the note rate, only the payment, or neither? Start with the number everyone gets wrong under pressure. One discount point is 1% of the loan amount.

Not the sales price, not the appraised value — the loan. The price of the house is a distractor the moment points appear. Two ways to buy down a rate, and they are not the same instrument. Discount points are a permanent buydown: cash at closing, and the note rate itself drops for the life of the loan.

A temporary buydown, like a two-one, never touches the note rate — a subsidy sits in an escrowed account and tops up a reduced payment. Exam version. A seller funds a two-one buydown on a 30-year fixed at six and a half percent, escrowed at closing. The answer: the payment is computed as if the rate were four and a half in year one and five and a half in year two, with the shortfall drawn from that account.

The note rate stays six and a half, the balance is untouched, and because the account covers the gap there is no negative amortization. Now the calculation the exam actually asks for: is buying points worth it? Two steps. Cost is points times 1% of the loan.

Break-even is that cost divided by the monthly savings, and it comes out in months. Points pay off only if the borrower keeps the loan past it. Exam version. A 335,000 dollar purchase, a 320,000 loan, and one and a half points to cut the payment by 52 dollars.

The answer: 4,800 dollars, and about 92 months — one and a half percent of the loan, not the purchase price, which is the trap. 92 months is about seven and a half years. Per-diem interest next, and it exists because mortgage interest is paid in arrears. You always pay for the month you just finished, so at closing the lender collects interest from the closing date through the end of that month — which is why the first payment is not due until the month after next.

Three steps: annual interest, divide by 365, count the days. Exam version. 265,000 at 6%, closing September twentieth, first payment November first. The answer: 479 dollars and 18 cents.

That is about 43 dollars and 56 cents a day, times 11 days. September twentieth through the thirtieth, counting the closing day, is 11 — not 10. The off-by-one is the whole question. Last idea, and it ties the lesson together.

The finance charge is the cost of credit in dollars; the annual percentage rate is that same cost as a rate, which is why it sits above the note rate. Origination fees, discount points, mortgage insurance and prepaid interest are all finance charges. Regulation Z excludes bona fide third-party real-estate fees — appraisal, credit report, title work, notary, recording. Exam version.

Which charge is not in the finance charge, and therefore not in the annual percentage rate? The answer: the appraisal fee paid to an independent appraiser. Prepaid interest, the origination fee and discount points are all in. The rule: money to the creditor for making the loan is a finance charge; a third-party real-estate fee is not.

Lock these in. A point is 1% of the loan amount. Discount points lower the note rate permanently; a temporary buydown lowers only the payment and never touches the balance. Break-even is cost divided by monthly savings.

Per-diem interest counts the closing day. And the appraisal fee stays out of the annual percentage rate. That completes General Mortgage Knowledge. Next up: origination activities, the largest domain on the exam.

Practice every one of these free at quibank.com/en/mlo. See you in lesson 21.