New Jersey Real Estate Salesperson · Real Estate Calculations
Finance Calculations
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In 30 seconds
The purchase price splits into a down payment and a loan, and everything else is measured against the loan. The tested distinction is that loan-to-value compares the loan to the lower of value or price as a percentage, while discount points are a percentage of the loan amount only, never of the price.
Why this matters
Loan problems chain four simple formulas, and the exam catches people who compute discount points on the purchase price instead of the loan amount or read loan-to-value as dollars instead of a percentage.
The college version
In normal terms
- Down payment equals purchase price times the down payment percentage; loan amount equals purchase price minus that down payment.
- Loan-to-value ratio equals the loan amount divided by the value or purchase price, multiplied by 100 to express it as a percentage.
- Discount points are prepaid interest charged as a percentage of the loan amount, so each point costs one percent of the loan, not of the price.
Concepts in this outline
- Loan amount: Purchase Price − Down Payment — purchase price is the contract price; down payment is the buyer's own cash toward it; the difference is the amount borrowed from the lender.
- Down payment: Purchase Price × Down Payment Percentage — purchase price times the percentage the buyer pays from personal funds, written as a decimal, gives the cash the buyer brings.
- Loan-to-value ratio: Loan Amount / Value or Purchase Price × 100 — loan amount divided by the lower of appraised value or purchase price, times 100, expressed as a percentage the lender uses to measure risk.
- Discount points: Loan Amount × Points Percentage — loan amount times the number of points as a percentage; each point is one percent of the loan, paid up front to the lender.
Eli explains
The same idea, in plain words
Explain it like I’m 10
Buying a house with a mortgage means paying part of the price yourself and borrowing the rest. The part you pay is the down payment, the price times the down payment percentage. What is left is the loan amount, the price minus the down payment. Those two always add back up to the price, a quick check on your work.
Lenders measure how much of the property they are financing with the loan-to-value ratio, or LTV. Divide the loan by the value or purchase price, using the lower when they differ, then multiply by 100 to read it as a percentage. A bigger down payment means a lower LTV and less lender risk. Why lenders care about LTV, and how points relate to interest rates, belong to finance (see Topic 04).
Discount points are money paid up front to the lender, usually to lower the interest rate. One point equals one percent of the loan amount. Multiply the loan amount, never the purchase price, by the points percentage to find the dollar cost.
Worked example
Marcus and Lena are buying a Cherry Hill colonial for $500,000 and plan a 20% down payment. Their licensee, Theo, walks them through the numbers. The down payment is $500,000 × 0.20 = $100,000. The loan amount is $500,000 − $100,000 = $400,000. The appraisal comes in at the full purchase price, so the loan-to-value ratio is $400,000 ÷ $500,000 × 100 = 80%. Their lender offers a lower rate if they pay two discount points, which cost $400,000 × 0.02 = $8,000, based on the loan, not the price. Theo shows them that $100,000 plus $400,000 equals the $500,000 price, so the split checks out before they sign anything.
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