A buyer is purchasing $500,000 property with an 80% loan to value. If the lender charges 3.5 discount points, how much would a borrower pay towards the points?

Rationale

A borrower would pay $14,000 towards the points.

To calculate the amount a borrower pays towards discount points, you multiply the loan amount by the percentage of the points. In this case, the loan amount is 80% of $500,000, which equals $400,000. With 3.5 discount points, the calculation is $400,000 x 0.035, resulting in $14,000.

A ($1,400) YOUR ANSWER

This amount is incorrect because it suggests that the points are calculated on a much smaller loan amount. If $1,400 were the cost of the points, it would imply a loan amount of only $40,000, which does not reflect the actual loan value based on the 80% loan-to-value ratio of the property.

B ($1,750) YOUR ANSWER

This choice miscalculates the cost of the points. To arrive at $1,750, one would incorrectly assume a loan amount of approximately $50,000, which fails to account for the true loan amount of $400,000 derived from the 80% of the property's value.

C ($14,000) CORRECT

This is the correct answer, calculated by determining the loan amount at 80% of $500,000, which is $400,000, and then multiplying that amount by 3.5% (or 0.035), leading to a total of $14,000 in points payable.

D ($17,500) YOUR ANSWER

This option represents an inflated figure that would imply a higher percentage of points or a larger loan amount than what is actually present. Specifically, $17,500 corresponds to a point cost of 4.375% of a $400,000 loan, which is not the case here.

Conclusion

The calculation of discount points is essential in real estate transactions to understand the upfront costs of obtaining a mortgage. In this scenario, the borrower correctly pays $14,000 in points based on the 80% loan-to-value ratio of the property and the 3.5% charged by the lender. Recognizing and calculating these financial aspects is crucial for buyers to effectively manage their property financing.

A buyer is purchasing $500,000 property with an 80% loan to value. If the lender charges 3.5 discount points, how much would a borrower pay towards the points?

A borrower would pay $14,000 towards the points.

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