Real estate exam terms
5 terms, each with a plain definition, the term it is most often confused with, and how the license exam actually asks about it.
Prepaid interest paid at closing to reduce the loan’s interest rate
One point is one percent of the loan amount, not of the purchase price. Paying points lowers the rate and therefore the monthly payment, which is worthwhile only if the borrower holds the loan long enough to recover the up-front cost.
The reliable trap is the base: points are calculated on the loan, and applying them to the price overstates the cost whenever the buyer put money down.
The value of an owner’s interest: market value less what is owed against it
It grows in two ways at once — as the loan balance falls through amortization and as the property’s value rises. It falls the same two ways, and can go negative when the balance exceeds the value.
A recurring maths item and a straightforward one: value minus liens.
The loan amount as a percentage of the property’s value or price
Lenders use it as the primary measure of their exposure. A larger down payment means a lower LTV, less risk to the lender and generally better terms for the borrower.
On conventional loans, an LTV above 80 percent generally triggers private mortgage insurance — a link the exam tests directly.
The lender’s charge for processing and making the loan
Often expressed in points as well, which is why it is mixed up with discount points constantly. It buys nothing except the loan itself — it does not lower the rate.
Origination pays the lender for work; discount buys down the rate. Both may appear on the same Loan Estimate.
Insurance protecting the lender against default on a high-LTV conventional loan
The borrower pays the premium and the lender receives the protection. It is generally required on conventional loans above 80 percent LTV and can be removed as the balance falls to a set threshold.
Two facts carry the items: who pays versus who is protected, and that FHA mortgage insurance follows different rules and does not simply drop off in the same way.
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