A lender quotes a borrower a mortgage with 2 discount points on a $320,000 loan in an Illinois transaction. Which of the following correctly describes how the cost of those discount points is determined?
Correct Answer
A) Each point equals 1% of the loan amount, so 2 points on this loan costs $6,400.
$6,400 is correct, and option B accurately describes the calculation. Discount points are prepaid interest charged by the lender at closing to reduce the loan's interest rate. One point equals 1% of the loan amount — not the purchase price, appraised value, or down payment. On a $320,000 loan, 2 points = $320,000 × 0.02 = $6,400. Borrowers pay points upfront to 'buy down' the rate and lower monthly payments over the loan term.
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Related Topics & Key Terms
Key Terms:
Related Concepts
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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In the context of foreclosure, a deed transfers ownership of the foreclosed property to the new owner, typically the buyer at a foreclosure sale.
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