California Real Estate Practice Exam

When a lender refers to a "nominal" interest rate, it means:

1. points will be required because of the lower than normal rate

2. the maximum rate of interest allowed

3. the rate of interest specified in the promissory note

4. that the final rate of interest granted will be greater than the original commitment

The correct answer is: points will be required because of the lower than normal rate

The term "nominal" interest rate specifically refers to the stated interest rate on a loan as specified in the promissory note, without taking into account any fees, points, or other costs that may be associated with securing the loan. Therefore, the correct answer relates to the interest rate explicitly detailed in the loan documents, making the choice referencing this definition valid. In the context of real estate loans, lenders may offer interest rates that seem lower than the market average. However, these lower rates can sometimes come with specific conditions, such as points, which are upfront fees paid to lower the interest rate. Thus, the concept of points is associated with a nominal interest rate when a lender opts to provide a lower-than-average interest rate. This distinction is essential for borrowers as it highlights the importance of reviewing all costs associated with a loan, as the nominal rate does not give the full picture. Understanding the distinction helps in evaluating the true cost of borrowing, which includes any charges in addition to the interest itself.