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 $8,000 in discount points.

Discount points are calculated as a percentage of the loan amount, which in this case is $200,000 minus the down payment of $40,000, resulting in a loan amount of $160,000. The lender charges 4 discount points, which equates to 4% of the loan amount, leading to a total cost of $6,400 for the borrower.

A ($1,600) YOUR ANSWER

This amount represents 1% of the loan amount of $160,000, which would be the cost if only 1 discount point were charged. Since the lender charges 4 points, this option significantly underestimates the total payment.

B ($4,000) YOUR ANSWER

This option reflects a calculation of 2.5% of the loan amount of $160,000, which does not correspond to the 4 points being charged. Therefore, it fails to represent the correct payment that the borrower is responsible for.

C ($6,400) CORRECT

This is the correct choice, representing 4% of the loan amount of $160,000. The borrower pays $6,400 in discount points, calculated as $160,000 multiplied by 0.04. This correctly accounts for the total cost of the discount points as specified by the lender.

D ($8,000) YOUR ANSWER

This option would imply the borrower is paying 5% of the loan amount. Since the lender only charges 4 points, this calculation is incorrect and reflects an overestimation of the discount points required.

Conclusion

In this scenario, the borrower calculates the amount for discount points based on the loan of $160,000 after the down payment. With 4 discount points charged, the total payment of $6,400 correctly captures the cost of borrowing, while the other options misrepresent this financial obligation. Understanding how discount points are calculated is essential for accurate financial planning in home buying.

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 $8,000 in discount points.

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