Loan points: applied to total purchase price or just loan amount?

Question

Hi Everyone-

I'm working on securing financing for a deal set to close on 2/1. It's an $80K deal, and I'm moving forward with conventional financing with 20%, for a total loan amount of $64K. I've decided to buy down the rate for 1 point, as discussed with my loan officer.

The loan package came across from the bank today, and the pre-paid interest is listed at $800, whereas my understanding is that the point should be only charged on the mortgage balance/loan amount of $64K (for a $640 total).

Was my understanding incorrect of was there a mistake on the bank's part?

Thanks all.

Eric

Chris Mason · Answer

You're getting your terms mixed up, I think. Points are "a form of" prepaid interest "for tax purposes."

What you're talking about is interest accruing from the COE date to when the next month ticks. Different thing. Close on the 2nd and you might have 28 days, close on the 30th and you might have 1 day. This is "normal" prepaid interest, disclosed to you as such.

Eric Veronica · Answer

Account Closed I haven’t heard “prepaid interest” as a term for points. Prepaid interest is usually a per diem (daily) interest charge from the date of closing to the end of the month.

For example if you closed a loan on January 10th and the 1st payment was due on March 1st then the loan estimate/closing disclosure would collect 22 days of interest from January 10th - January 31st.

Account Closed · Answer

@Jay Hinrichs

Cool, thanks for the info, Jay. I've reached out to the loan officer for clarification.

Eric

Jay Hinrichs · Answer

ya never heard points being paid on total purchase price only loan amount

Loan points: applied to total purchase price or just loan amount?

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