Understanding Yield in California Real Estate Transactions

Payment of three points on a note whose rate is 6% will increase the yield to the lender to

• A. 6%
• B. 6 1/8%
• C. 6 3/8%
• D. 6 1/2%

Answer: (C)

Increasing the payment on a loan can increase the yield to the lender. In this case, the rate of the note is 6% and increasing the payment by three points will result in a yield of 6 3/8%. This is because three points is equivalent to 0.75%, which added to the original 6% rate gives a new rate of 6.75%. To find the percentage yield, we subtract the original rate of 6% from the new rate of 6.75%, giving a yield of 0.75% or 6 3/8%. Options A and B are incorrect because they do not take into account the increase in payment, resulting in a lower yield. Option D is also incorrect because it is too high of a rate for an increase of only three points.

When you're preparing for the California Real Estate exam, understanding yield and payment points is crucial. Let's break down how a seemingly simple question can deeply influence your understanding of lending dynamics—essential knowledge for any real estate professional.

So, picture this: You have a note with a rate of 6%. Sounds pretty straightforward, right? However, if you increase the payment by three points, it’s going to boost the yield for the lender to 6 3/8%. Let’s unpack that a bit.

Now, what are these points, and why do they matter? When we talk about “points,” we’re referring to a percentage of the loan amount that a borrower pays upfront as a fee to lower their interest rate. In our scenario, three points equate to 0.75%. Adding that to our original rate gives us a shiny new yield of 6.75%. Sounds great, doesn’t it? But here’s the kicker—how do we translate that into what the lender actually earns?

To find the percentage yield, it’s simple math. We subtract the original rate (6%) from the new rate (6.75%), which gives us a yield of 0.75%—or, in terms of the options given, 6 3/8%! This means the lender's effective yield on the investment has increased thanks to those additional payment points.

Now, you might wonder why the other options are wrong. Options A and B (6% and 6 1/8%) don’t factor in the increase brought on by the three points. They leave the lender's yield disappointingly flat. Meanwhile, Option D (6 1/2%) is simply too high given the three points' modest tweak to the yield. It’s all about that precise adjustment.

Understanding these nuances isn’t just academic; it’s vital for navigating the real estate market. By mastering concepts like yield and payment points, you’re gearing yourself up to make informed decisions that can significantly impact your clients’ financial outcomes.

And guess what? Not only does this knowledge help you pass the exam, but it also equips you to serve your future clients better. After all, when you're armed with the right information, you can effectively guide homeowners and investors through the maze of real estate transactions.

In conclusion, grasping how payment adjustments influence lender yields is just one piece of the complex puzzle of real estate. The more you understand, the better prepared you'll be to tackle the tricky questions that pop up in the California Real Estate exam. So buckle up and enjoy the ride—it’s a worthwhile journey designed to position you as a knowledgeable and reliable real estate professional!