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

Rationale

$14,000

To calculate the amount the borrower would pay towards the discount points, we first determine the loan amount based on the purchase price and loan-to-value ratio. With an 80% loan-to-value ratio on a $500,000 property, the loan amount is $400,000. The lender's 3.5 discount points are applied to the loan amount, translating to $14,000 in costs for the borrower.

A ($1,400) YOUR ANSWER

This amount represents 0.35% of the loan amount ($400,000), which is incorrect for discount points. Discount points are calculated as a percentage of the total loan amount (in this case, 3.5%), not a fraction of it. Therefore, $1,400 does not reflect the total cost associated with the discount points charged by the lender.

B ($1,750) YOUR ANSWER

This figure, representing 0.4375% of the loan amount, is also incorrect. It does not correspond to the 3.5% discount points applied to the total loan amount. Borrowers must calculate discount points as a percentage of the full loan amount ($400,000), not an arbitrary fraction that results in $1,750.

C ($14,000) CORRECT

This is the correct amount as it accurately reflects the cost of the discount points based on the loan amount of $400,000. The calculation involves multiplying the loan amount by the discount points percentage (3.5% of $400,000), leading to a total of $14,000.

D ($17,500) YOUR ANSWER

This amount incorrectly suggests a higher cost than what is justified by the discount points. It represents 4.375% of the loan amount, which is more than the 3.5% charged by the lender. Therefore, $17,500 is not a valid calculation for the points owed by the borrower.

Conclusion

In real estate transactions, calculating the cost of discount points is crucial for borrowers. In this case, the borrower pays $14,000 for the 3.5 discount points on an $400,000 loan derived from the $500,000 property purchase. This amount exemplifies the importance of understanding loan-to-value ratios and the impact of discount points on overall borrowing costs.

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

$14,000

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