Commission and Financing Costs

This section covers how commissions and loan costs are calculated. These are straightforward formulas, but the exam often tests them with word problems.

Commission Calculations

Commission is usually a percentage of the sales price.

$\text{Commission} = \text{Sales Price} \times \text{Commission Rate}$

Example:

Sales price = $350,000 Commission rate = 6%

Commission = $350,000 × 0.06 = $21,000

Commission Split Example

If the commission is $21,000 and the broker and agent split 70/30:

• Agent receives $14,700
• Broker keeps $6,300

Interest Basics

Many exam questions use simple interest.

$\text{Simple Interest} = \text{Principal} \times \text{Rate} \times \text{Time}$

Example:

$200,000 loan at 5% for 1 year:

Interest = $200,000 × 0.05 × 1 = $10,000

Discount Points

Points are prepaid interest. One point = 1% of the loan amount.

$\text{Points Cost} = \text{Loan Amount} \times \text{Points (as decimal)}$

Example:

Loan amount = $250,000 Points = 2

Cost = $250,000 × 0.02 = $5,000

Points increase upfront cost but reduce the interest rate.

Loan-to-Value (LTV)

$\text{LTV} = \frac{\text{Loan Amount}}{\text{Property Value}}$

Example:

Loan amount = $240,000 Value = $300,000

LTV = $240,000 ÷ $300,000 = 80%

Amortization Basics

Amortized loans allocate more interest in early payments and more principal in later payments. This is why early loan payoff savings can be significant.

Loan Costs and Fees

Common financing costs include:

• Origination fees
• Discount points
• Appraisal fees
• Credit report fees

Table: Common Financing Calculations

These costs are reflected on the Closing Disclosure.

Example: Loan Interest and Points

Loan amount = $200,000 Rate = 6% Time = 1 year Interest = $200,000 × 0.06 × 1 = $12,000

Points example: 2 points on $200,000 = $4,000

Exam Application Check

• To find commission, multiply price by rate.
• To find points cost, multiply loan amount by the points.
• To calculate LTV, divide loan amount by value.
• Points are prepaid interest that reduce the rate but increase upfront cost.

Commission Splits and Broker Payouts

A typical transaction may split commission between the listing and buyer broker. Then each broker may split with their agent based on the brokerage agreement.

Example:

• Total commission: $18,000
• Listing side: $9,000, buyer side: $9,000
• Agent split 70/30

Listing agent receives $6,300 and the broker keeps $2,700. This is a common exam-style calculation.

Net Listings Reminder

Net listings can create conflicts of interest because the broker keeps any amount above the net price. They are illegal in some states and should be avoided in practice.

Exam Application Check

If a question asks how commission is divided, identify the total commission first, then apply each split.

Financing Cost Terms

Common loan cost terms include:

• Origination fee - Lender charge to process the loan
• Discount points - Prepaid interest to lower the rate
• Prepayment penalty - Fee for paying off early
• Amortization - Gradual reduction of loan balance

Amortization Example

A 30-year fixed loan has the same payment each month, but interest dominates early payments. Over time, the principal portion grows. This is why early extra payments reduce the total interest paid.

Exam Application Check

If a question asks which cost is prepaid interest, the answer is points. If it asks which fee penalizes early payoff, the answer is a prepayment penalty.

APR vs. Interest Rate

The interest rate is the cost of borrowing on the loan balance. The APR includes the interest rate plus certain fees and points, which is why APR is often higher than the stated rate. This helps borrowers compare loans with different fee structures.

Prepayment and Balloon Loans

A prepayment penalty discourages early payoff. A balloon loan has a large final payment at the end of the term. These features affect total cost and are tested on exams.

Exam Application Check

If a question asks which number includes fees and points, the answer is APR. If it asks which loan has a large final payment, the answer is a balloon loan.

Mortgage Insurance and Cash to Close

Private mortgage insurance (PMI) - Insurance that protects the lender when the borrower has a high LTV, often above 80%. Lender credit - A credit from the lender that offsets closing costs in exchange for a higher interest rate.

PMI adds to the monthly payment, so exam questions may test whether it is required based on LTV. A lender credit lowers the cash needed at closing but increases the long-term cost through a higher rate.

Cash to Close Formula

$\text{Cash to Close} = \text{Down Payment} + \text{Closing Costs} + \text{Prepaids} - \text{Credits}$

Example:

Price = $300,000 Down payment = 20% = $60,000 Closing costs = $9,000 Prepaids = $2,000 Seller credit = $5,000

Cash to close = $60,000 + $9,000 + $2,000 − $5,000 = $66,000

Exam Application Check

If LTV is 90%, PMI is likely required. If a question asks for cash to close, subtract credits from the total.

Commission on Leases and Management

Some brokerages earn fees for property management or leasing. A common structure is one month of rent for a new lease plus a monthly management fee. The exam may present a simple percentage calculation similar to sales commission.

Example:

Monthly rent = $2,000 Leasing fee = 50% of one month Fee = $2,000 × 0.50 = $1,000

Exam Application Check

If a question asks for a management fee based on rent, multiply monthly rent by the fee percentage.