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 for the points?

Rationale

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

To calculate the cost of discount points, one must first determine the loan amount. With an 80% loan-to-value (LTV) on a $500,000 property, the loan amount is $400,000. Discount points are typically calculated as a percentage of the loan amount, so 3.5 points translates to $14,000 (3.5% of $400,000).

A ($1,400) YOUR ANSWER

This amount represents only 0.35% of the loan amount ($400,000), which does not accurately reflect the 3.5 discount points being charged. Therefore, this value is significantly lower than the correct calculation.

B ($1,750) YOUR ANSWER

This figure corresponds to 0.4375% of the loan amount, which again does not align with the 3.5 discount points. The borrower would not incur this amount for the points, as it is still far below the required total.

C ($14,000) CORRECT

This is the correct answer, calculated by finding 3.5% of the loan amount of $400,000. This equates to $14,000, reflecting the total cost the borrower must pay for the discount points charged by the lender.

D ($17,500) YOUR ANSWER

This amount represents 4.375% of the loan amount, which is incorrect for the stated 3.5 discount points. It exceeds the actual cost of points, leading to an overestimation that does not apply to this transaction.

Conclusion

When purchasing a property with an 80% loan-to-value ratio, the cost for discount points can be accurately calculated by applying the percentage to the loan amount. In this case, the borrower pays $14,000 for the 3.5 discount points based on a loan of $400,000. Understanding how to compute these costs is essential for buyers to assess their total expenses effectively.

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 for the points?

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

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