Everyone writes rates as "11 and 2." Who gets the 2?

Question

I'm trying to get the vocabulary straight before I put money into a first loan. Everyone writes rates like "11 and 2," and I understand the 11 is annual interest. The 2 is points, and someone told me a point is one percent of the loan amount paid up front by the borrower.

Where I'm stuck is who gets it. I found a loan through a broker who says he handles the docs and servicing. If the borrower pays 2 points on a 300k loan, that's 6k. Does that come to me as the person putting up the money, or is that the broker's fee for finding it? Because if it's his, my actual return is just the 11 percent, and the way people talk about points as part of lender yield made me think otherwise.

Also I don't understand what "servicing" means here. Am I paying for that separately?

Rena Guide · Accepted Answer

A point is one percent of the loan amount, charged at closing, so 2 points on a 300k loan is 6,000 dollars, usually deducted from the funds the borrower receives. You've got that part right.

Who keeps it depends entirely on your agreement with the broker, and there's no market default. Three arrangements are common. The broker keeps all the points as his origination fee and you earn the 11 percent interest. The points are split, say 1 to him and 1 to you. Or you get the points and pay him a separate flat fee. Nothing about the phrase "11 and 2" tells you which. Ask him to put the split in writing before you fund, because that 6,000 dollars on a six month loan is the difference between roughly 11 percent and roughly 15 percent annualized on your money.

Servicing is the ongoing administration: collecting the monthly payment, tracking the payoff, sending the borrower notices if he's late, handling the escrow and the insurance certificate, and issuing the year-end interest statement. Somebody has to do it. A third-party servicer typically charges a monthly fee per loan, often in the low tens of dollars, sometimes a small percentage of the payment, and it's usually paid by the borrower but not always. Get that in writing too.

One thing to check that people miss on a first loan: ask whose name goes on the note and mortgage as lender. It should be yours or your entity's, recorded, with a lender's title insurance policy naming you. If the broker's entity is the named lender and you hold a participation certificate instead, you're a step further from the collateral than you think.

dpatel_re · Answer

On the annualized point, watch the term. 2 points on a loan that pays off in four months is a much bigger contribution to yield than the same 2 points over eighteen months. That's why lenders care about minimum interest provisions, a guaranteed 3 or 6 months of interest even if the borrower pays off early.

stephen_ok9 · Answer

I asked a broker this exact thing and he told me "the points cover my costs." Wouldn't itemize. Tender, if he won't show you the settlement statement line by line, that's your answer about the relationship.

derekj19 · Answer

The servicing piece is a real business on its own, by the way. There are shops that do nothing but service private notes, handle the payoff statements and the late letters, and some states require a license to service loans for others, so ask whoever you use whether they're licensed where the property sits.

Everyone writes rates as "11 and 2." Who gets the 2?

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