A borrower pays $200,000 for a home. The buyer makes a down payment of $40,000 and obtains a loan for the balance of the purchase price. The lender charges 4 discount points for the loan. How much will the borrower pay in discount points?

Rationale

The borrower will pay $6,400 in discount points.

Discount points are calculated as a percentage of the loan amount, and in this case, the borrower is financing $160,000 after making a $40,000 down payment on the $200,000 purchase price. At 4 discount points, the total cost in discount points amounts to $6,400.

A ($1,600) YOUR ANSWER

This option represents 1 discount point on the loan amount of $160,000, which is calculated as 1% of the loan. Since the borrower is paying 4 discount points, this figure is significantly lower than the correct amount.

B ($4,000) YOUR ANSWER

This amount corresponds to 2.5 discount points on the loan amount of $160,000 (which is 2.5% of the loan). While it is closer to the correct answer, it still does not account for the full 4 discount points being charged.

C ($6,400) CORRECT

This is the correct calculation, representing 4 discount points on the loan of $160,000. Each point is equivalent to 1% of the loan amount, so 4 points equals 4% of $160,000, which results in $6,400.

D ($8,000) YOUR ANSWER

This figure would represent 5 discount points on the loan amount of $160,000, which is 5% of the loan. Since only 4 discount points are being charged, this amount is incorrect.

Conclusion

The calculation of discount points is critical for borrowers to understand the upfront costs of securing a loan. In this scenario, the borrower pays 4 points on a loan amount of $160,000, resulting in a payment of $6,400. Understanding the mechanics behind discount points helps borrowers make informed decisions related to their mortgage financing.

A borrower pays $200,000 for a home. The buyer makes a down payment of $40,000 and obtains a loan for the balance of the purchase price. The lender charges 4 discount points for the loan. How much will the borrower pay in discount points?

The borrower will pay $6,400 in discount points.

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