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# What Are Points and How Do They Impact Closing Costs?

As a real estate investor it is important to master the 4 key real estate loan calculations.  These 4 key calculations include how to calculate a point, simple interest, loan to ARV, and loan to value. Today we are going to focus on points and discover how they can impact your closing costs. Let’s start by taking a closer look at what points are.

## What is a point?

When a lender says that they are going to charge you 1 or 2 points, what exactly does that mean? A point in the lender world means percent. Therefore, 2 points for example equals 2%. To clarify, it’s 2% of your loan amount, as opposed to 2% of your purchase price. This percentage is the amount that you are paying in the origination to the lender and it is included in your closing costs. The closing costs will also include down payment, appraisal, just to name a few. Let’s jump into an example to see how to calculate point.

### For example:

Loan for \$150,000

They will charge you 2%

Origination fee = \$3,000

\$150,000 x .02 = \$3,000

You need to understand how to calculate a point because it will impact your closing cost and your overall cost of doing business.

## In conclusion

Whether you’re a new investor or an old pro, you need to master the 4 key real estate loan calculations. As an investor, these are the things that you are going to come across when you are working with lenders. By focusing on how to calculate point today, you are now able to determine the origination fee quickly and easily. To learn how to master the 3 remaining key real estate loan calculations, please visit our

Watch our most recent video to Master These 4 Key Real Estate Loan Calculations.

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# Real Estate Investing: Points and Interest Explained

Today we are going to explain what points and interest are in regards to real estate investing. This is something that needs to be considered when you are applying for a loan in order to ensure that you get the best deal. Whether it’s a hard money loan, a private loan, a bank loan, or even OPM (Other People’s Money)? Each situation is different! It’s essential to know what works best for you. Let’s get started!

## Factors to Consider

### Speed of Funding

In real estate, speed can make or break a deal. Sellers prefer buyers who can close quickly with no hassle. So, you need to know which lender can fund the fastest.

### Down Payment

Down payments can vary. With hard money, you might get 100% financing, but usually, you’ll need 10-20% down.

Example: If you’re buying a \$300,000 property, a 10% down payment means you need \$30,000 upfront.

### Points and Interest Rates

Points are fees paid to the lender, usually as a percentage of the loan amount. Interest rates can range from 10% to 12% or more.

Example: On a \$270,000 loan with 1 point, you’ll pay \$2,700 upfront. At 12% interest, you’ll pay \$2,700 monthly.

Lenders may charge other fees like escrow fees, draw fees, underwriting, and appraisal fees. These can add up, especially on smaller loans.

Example: A \$200,000 loan might come with \$1,900 in fees, affecting your overall cost.

## How to Choose the Best Loan

1. Compare Costs: Use our free Loan Cost Optimizer tool on our website to compare lenders and see who offers the best deal.
2. Check Funding Speed: Make sure your lender can close the deal quickly to avoid losing it.
3. Evaluate All Fees: Look at points, interest rates, and other fees to get the full picture.

## Conclusion

In sum, the best loan for your fix and flip is the one that costs you the least and funds on time. At The Cash Flow Company, our goal is to help you get the best lending options available. If you have a question or a deal to discuss, reach out to us. Visit our website, download our Loan Cost Optimizer, to not only compare lenders, but to also find the best deal for you.

Watch our most recent video to discover more about: Real Estate Investing: Points and Interest Explained

## What is a Point in Real Estate Investing?

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What is your lender talking about when they mention points on your loan? What is a point in real estate investing?

Real estate, like many fields, has its own vocabulary. This can make it extra challenging for people who are trying to enter the real estate investing world.

So many people come to us confused. Sometimes they don’t even know what to ask because the language is so unfamiliar.

Real estate is all about leverage. Understanding the lingo and how to calculate the most common rates will help you be money-wise and confident in your investment journey.

## What is a “Point”?

When your lender mentions that something is “one point” or maybe “one and half points,” they’re talking about out-of-pocket cost. So what is a point in real estate investing?

“Points” are a percentage of the loan that the lender is going to charge you.

Hypothetically, let’s say your lender says your loan is a “two point” cost to you. That means they’re going to charge you 2% of the total loan amount.

• Total Loan Amount: \$200,000
• Points: 2 (meaning 2% or 0.02)
• Calculation: 200,000 x 0.02 = \$4,000
• Out-of-pocket Cost for the Loan: \$4,000

The lower the points, the lower the cost; the higher the points, the higher the cost. Also, remember that the points are calculated off the loan amount, not the purchase price.

Always remember to look out for fees. Points are often only part of the upfront charges from your lender.

Watch the full video here:

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## Real Estate Lingo Explained: Understanding Your Lender

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Learn the meaning behind your lender’s real estate lingo so you always know what’s going on.

Real estate, like many fields, has its own vocabulary. This can make it extra challenging for people who are trying to enter the real estate investing world.

So many people come to us confused. Sometimes they don’t even know what to ask because the language is so unfamiliar.

Real estate is all about leverage. Understanding the lingo and how to calculate the most common rates will help you be money-wise and confident in your investment journey.

## 1. “Points”

When your lender mentions that something is “one point” or maybe “one and half points,” they’re talking about out-of-pocket cost. So what is a point in real estate investing?

“Points” are a percentage of the loan that the lender is going to charge you.

Hypothetically, let’s say your lender says your loan is a “two point” cost to you. That means they’re going to charge you 2% of the total loan amount.

• Total Loan Amount: \$200,000
• Points: 2 (meaning 2% or 0.02)
• Calculation: 200,000 x 0.02 = \$4,000
• Out-of-pocket Cost for the Loan: \$4,000

The lower the points, the lower the cost; the higher the points, the higher the cost. Also, remember that the points are calculated off the loan amount, not the purchase price.

Always remember to look out for fees. Points are often only part of the upfront charges from your lender.

## 2. “Rate”

Lenders talking about interest rates can get very confusing very quickly.

The common real estate lingo of saying you have a “10% rate” does not mean you have a flat 10% interest regardless of how long you keep the money out.

“Rate” refers to the simple interest rate over a year, NOT your monthly interest rate.

To find your monthly interest rate, divide by 12.

• Total Loan Amount: \$200,000
• Rate: 10%
• Calculation: (200,000 x 0.10) / 12 = 1,667
• Monthly Interest Rate: \$1,667

Essentially, if you have your loan for six months (half a year) and you have a 10% rate, you’ll end up paying 5%.

## 3. “Payments”

When do payments start? How much do they cost?

If you’re new to real estate investing, it’s a good idea to ask a lot of questions about payments so you know what to have in your budget before you begin.

A few terms to look out for:

“Arrears”

Product interest always shows up after the fact (in “arrears”). Basically, your July 1st payment is going to pay all of the interest for June.

Interest accumulates over the course of a month. Then the bill shows up after.

This how all mortgages are set up. So when you’re trying to figure out your payments and when they’re due, always look ahead 30-45 days after you close for the first payment.

Payments are typically due on the 1st or 15th of the month. Check with your specific lender to make sure you know your pay period.

“Simple Interest”

Above, we showed you how to calculate your monthly interest rate based on the simple interest rate of your loan.

When you start paying off your loan, you’ll see a big accumulation of interest. If you’ve taken time to calculate your monthly rate, this shouldn’t be a surprise to you. You can multiply that monthly rate by however long your project took to find your overall interest cost.

You need money to make money in real estate, but you want to know the cost ahead of time as closely as possible.

Take time to figure out these numbers up front so you don’t have any surprises.

## 4. “Prepayments” or “Prepay Penalties”

You’ll likely see real estate lenders use lingo like “prepays” on products like DSCR or non-QM loans.

“Prepayment penalties” are fees some lenders charge to guarantee a loan is out a certain amount of time.

Essentially, if you pay off a loan during the prepay period, the lender will charge an added fee to ensure they’re making a profit.

Prepays come in all shapes and sizes but often show up in either a 3- or 5-year period. We recommend checking out this previous post to learn more about the intricacies of prepay penalties.

In terms of types of penalties, there are straight and declining prepay options:

• “Straight Prepay” means that you will pay an agreed-upon percentage if you pay of the loan anytime during the prepay period. For example, if you have a straight 5-year 5% prepay penalty, you will be charged 5% whether you pay it off after 1 year or 4 years.
• A “Declining Prepay” might start with a higher percentage, but the penalty gets smaller the longer you keep the loan until it disappears altogether. The first year, the penalty might be 5%, 4% the next, etc.

It’s always a good idea to check the prepayment penalties. Sometimes you can buy them down. But you should always make sure that higher fee is actually worth it. Often the trade-off comes in the form of a higher interest rate.

Don’t fall into a trap of paying a much higher interest rate for a slightly lower prepay penalty.