Points Paid on a Loan – How to pay with Points or Interest
Most lenders when pricing a Real Estate Loan and sometimes with any loan that they price, charge the borrower a percent of the loan as a loan fee. This is very common when you are looking a Commercial Loan for Investor Real Estate or for any commercial purpose. Sometimes this fee can be tied to risk. This percent fee amount would depend on the perceived risk of the lender.
The Point or Points would be one percent of the loan for every point. So for a $100,000 loan, the point (if the lender was charging one point), would be 1% or $1,000. This amount may be hard to come up with, especially if the points are higher like at 2% or 3%.
One way to make the loan without any points is to have the lender raise the interest on the loan by one third of a percent (1/3% or 0.33%). Let’s look at the $100,000 Loan at 6% for 20 years. If we increase the interest rate to 6.33% then the lender will recoup his $1,000 in roughly four years and every year after the four is extra income to the bank. Of course the bank will usually only fix the rate for three to five years so it works well with a bank to get their points in interest over the loan. This can be sweetened by increasing the loan by one half percent and the bank will recoup their money in two years with another $1,000 made in the next two years.
Sometimes banks are inflexible but this can be used with banks that are looking at the return on the investment and not the cash up front on an investment or loan.
Note: Sometimes the Loan Officer is rewarded for how much money he or she brings into the bank in fees. These fees are usually worth more to the bank if they are generated now rather than later.
Note 2: The time for the bank to recoup the interest rate on a 10 year loan (amortized for 10 years) will be about 5 years to recoup the 1% point by increasing the interest rate by 1/3% or 0.33%.
Note 3: The bank can just increase the loan for the points and take out their points at closing. The loan would be for $101,000 and the bank would give the borrower $100,000 and the bank would take out for itself the $1,000 in points. This is how most small banks do it.
Remember to also check my website at www.schlueterfinancial.com for other info.