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

Rationale

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

To calculate the amount the borrower pays in discount points, we first determine the loan amount based on the 80% loan-to-value ratio of the $500,000 property. This results in a loan amount of $400,000. With 3.5 points being 3.5% of the loan amount, the borrower would pay $14,000 in points.

A ($1,400) YOUR ANSWER

This amount represents 0.35% of the loan amount ($400,000), which is incorrect. It appears to be a miscalculation, as the correct percentage for 3.5 points is much higher than this figure.

B ($1,750) YOUR ANSWER

This figure is also a miscalculation. It represents 0.4375% of the loan amount, which is still too low given that 3.5 points equate to 3.5% of the loan amount, hence not accurately reflecting the cost of the discount points.

C ($14,000) CORRECT

This is the correct answer, calculated by taking 3.5% of the $400,000 loan amount. Specifically, $400,000 multiplied by 0.035 equals $14,000, which accurately reflects the cost of the discount points.

D ($17,500) YOUR ANSWER

This amount suggests a 4.375% cost of the loan amount, which is incorrect. It exceeds the 3.5% required by the lender for discount points and does not correspond to any logical calculation based on the loan amount.

Conclusion

In this scenario, the calculation of discount points is crucial for understanding upfront costs associated with a mortgage. The borrower pays $14,000 for 3.5 discount points on a $400,000 loan, confirming that accurate percentage calculations are essential in real estate transactions. The other options presented are significantly lower or higher than what the borrower would actually owe, demonstrating the importance of precise financial computation.

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

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

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