An Ohio buyer is comparing two loan options: Loan A with a 5.5% interest rate and 1 discount point, or Loan B with a 6% interest rate and no points. For a $250,000 loan, what is the upfront cost difference between the two options?
Correct Answer
B) Loan A costs $2,500 more upfront than Loan B
Loan A has 1 discount point = 1% × $250,000 = $2,500 upfront cost. Loan B has 0 points = $0 upfront cost. Difference: Loan A costs $2,500 more upfront. The trade-off is that Loan A has a lower interest rate (5.5% vs 6%), resulting in lower monthly payments over the life of the loan.
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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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