When a loan is quoted as 11 and 2, who actually receives the 2 points

Question

Vocabulary worth getting straight before anyone funds a first loan. Rates get written like "11 and 2." The 11 is annual interest. The 2 is points, and a point is one percent of the loan amount, paid up front by the borrower. The part that trips people up is who receives it. Say the loan came through a broker who handles the docs and the servicing. If the borrower pays 2 points on a 300k loan, that is 6k. Does that go to the person putting up the money, or is it the broker's fee for finding the deal? If it is the broker's, the funder's actual return is the 11 percent alone, and the way people talk about points as part of lender yield suggests otherwise. Servicing deserves a plain definition in the same discussion, along with whether the funder pays for it 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. Two points on a loan that pays off in four months is a much bigger contribution to yield than the same two points over eighteen months. That is why lenders care about minimum interest provisions, a guaranteed three or six 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.

When a loan is quoted as 11 and 2, who actually receives the 2 points

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