The terms of a mortgage require that a borrower pay $4,000 in loan discount points. If the mortgage is $80,000, how many discount points have to be paid

Rationale

5 discount points have to be paid.

Discount points are a form of prepaid interest on a mortgage, where each point equals 1% of the total loan amount. In this case, with an $80,000 mortgage, 5 discount points would equate to $4,000, as each point costs $800.

A (3) YOUR ANSWER

If 3 discount points were paid, the total cost would be $2,400 (3% of $80,000). This amount does not match the required payment of $4,000, indicating that 3 points is insufficient to meet the terms of the mortgage.

B (4) YOUR ANSWER

Paying 4 discount points would result in a total payment of $3,200 (4% of $80,000). Although closer, this amount still falls short of the $4,000 requirement, thus making 4 points an incorrect answer.

C (5) CORRECT

Five discount points correspond to a payment of $4,000, which is exactly 5% of the $80,000 mortgage. This matches the specified terms, confirming that 5 points is the correct answer.

D (6) YOUR ANSWER

Choosing to pay 6 discount points would mean a total payment of $4,800 (6% of $80,000). This exceeds the required payment of $4,000, illustrating that 6 points is not a viable option for this mortgage situation.

Conclusion

In summary, the calculation of discount points shows that 5 points, equating to $4,000, is necessary for a mortgage of $80,000. Other choices either fall short or exceed the required payment, underscoring the importance of understanding how discount points relate to the total loan amount in mortgage agreements.

The terms of a mortgage require that a borrower pay $4,000 in loan discount points. If the mortgage is $80,000, how many discount points have to be paid

5 discount points have to be paid.

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