A borrower pays 2 discount points on a $350,000 loan to move the rate from 6.75% to 6.375%. For this fixed-rate loan, what does paying the two discount points purchase?
Correct Answer
C) The $7,000 permanently lowers the note rate for the whole term
C. The $7,000 buys the stated lower note rate for this fixed-rate loan. One point is 1% of the loan amount, so $350,000 × 2% = $7,000. The quoted reduction is 0.375 percentage point. The rate reduction purchased per point is not a universal constant. Scope and exceptions: Refinancing or paying off this loan ends its future interest savings. Whether paying points is worthwhile depends on the upfront cost, monthly savings and time the loan is retained. The question does not supply enough information to calculate a break-even month; other upfront fees are not necessarily discount points. Source: Discount points definition and break-even discussion — https://www.consumerfinance.gov/data-research/research-reports/data-spotlight-trends-in-discount-points-amid-rising-interest-rates/
Why This Is the Correct Answer
C. The $7,000 buys the stated lower note rate for this fixed-rate loan. One point is 1% of the loan amount, so $350,000 × 2% = $7,000. The quoted reduction is 0.375 percentage point. The rate reduction purchased per point is not a universal constant. Scope and exceptions: Refinancing or paying off this loan ends its future interest savings. Whether paying points is worthwhile depends on the upfront cost, monthly savings and time the loan is retained. The question does not supply enough information to calculate a break-even month; other upfront fees are not necessarily discount points.
Why the Other Options Are Wrong
Option A: The $7,000 is refunded at payoff if the loan runs under 5 years
Early payoff does not create the proposed automatic refund entitlement.
Option B: The $7,000 is a lender fee and does not affect the note rate
The question specifically identifies discount points purchasing a lower rate.
Option D: The $7,000 lowers the payment for 2 years and then it resets
A two-year payment subsidy describes a temporary buydown instead.
Exam Tip
Calculate point cost separately from the quoted rate reduction and break-even period.
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