Discounting Tutorial
AMERICAN EXAMPLE
Discount points, often referred to simply as points, are usually the most significant part of fees charged by lenders or brokers. Each point equals 1% of your loan amount (Balance).
In the USA, the Truth in Lending interest rate is called the APR. For a 30 year loan at 10% plus the three points repaid over the full 30 years, the APR is 10.37% (you enter the 3 points, 3% of $100,000 as $3000 as the Dollar Discount).
The APR depends upon how long you keep your loan. If the $100,000 loan was repaid after 6 years (72 months) rather than 30 years (360 months) its APR would be 10.70% as shown below.
CANADIAN EXAMPLES
(Same mathematics different explanations)
1. If the current balance of a Canadian mortgage was $149,999.63 and there were 36 months remaining on the term rate of 11% it would cost the borrower $15,440 in order to lower the rate to 7% for the next 36 months. The borrower would change four quarters for a dollar and save nothing if he/she paid the $15,440 “penalty”.
2. A Canadian home builder was selling homes for $149,999.63 and taking back the 11% mortgage for 36 months. Sales were slow so he did a buy down calculation. He raised the price of the homes to $165,439.63 and took back the mortgages for 36 months at 7% and sales greatly improved as home buyers were impressed by the low interest rate. The builder received the exact amount of money.
