A Florida real estate broker is working with a first-time homebuyer who asks about points on a mortgage loan. The lender is offering to reduce the interest rate from 7.0% to 6.75% in exchange for paying 2 points. How should the broker explain this to the buyer?
Correct Answer
D) Each point equals 1% of the loan amount paid upfront to reduce the interest rate
Correct: Points are prepaid interest where each point equals 1% of the loan amount, paid upfront to reduce the interest rate. Option A is incorrect as points are legal. Option C is wrong since points can benefit borrowers through lower rates. Option D confuses points with down payments.
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Related Topics & Key Terms
Key Terms:
Related Concepts
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period. The rate adjustment is tied to a financial index plus a margin.
Closing costs are the fees and expenses paid by the buyer and seller at the closing of a real estate transaction, beyond the purchase price. They typically range from 2-5% of the purchase price.
A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. It is originated and funded by private lenders and may be conforming or non-conforming.
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