Loan-to-value, points, and interest

Loan-to-value (LTV)

LTV is the loan amount divided by the property's value. Lenders use the lower of the sales price or the appraised value.

Maximum loan = lower of price or appraisal × LTV

The buyer's down payment covers the gap between the price and the loan, so a low appraisal raises the cash the buyer needs.

Discount points

One point is 1% of the loan amount, not of the sales price. Two and a half points on a $240,000 loan are 0.025 × $240,000 = $6,000. Read the problem carefully: if it gives a price and an LTV, find the loan first.

Simple interest

Interest = principal × annual rate × time in years

For months, use months ÷ 12. A $10,000 loan at 9% for 8 months costs $10,000 × 0.09 × 8 ÷ 12 = $600.

Splitting a mortgage payment

A fixed-rate payment is the same every month, but the split between interest and principal changes.

1. Monthly interest = current balance × annual rate ÷ 12.
2. Principal paid = monthly payment − monthly interest.
3. New balance = old balance − principal paid.

Because interest is charged on the remaining balance, early payments are mostly interest. The exam may ask for any one of these three numbers, so label each step as you go.