Discount points are paid to do what?

Discount points are paid to do what?

• A. Increase the loan amount
• B. Lower the interest rate
• C. Increase monthly payment
• D. Reduce loan term

Answer: (B)

Discount points are upfront fees paid to lower the interest rate on a mortgage. Each point typically costs 1% of the loan amount and reduces the rate by a certain amount (often around 0.25 percentage points, though it varies by lender). By paying points at closing, you gain a lower monthly payment and pay less interest over the life of the loan. You can pay points with cash at closing or roll them into the loan; if you finance them, the loan amount increases and you’ll pay more interest overall, even with a lower rate. The decision to pay points depends on how long you expect to keep the loan—if you stay long enough to recoup the upfront cost through lower payments, points can be worthwhile; if you might refinance or sell soon, they may not be worth it.

Discount points are upfront fees paid to lower the interest rate on a mortgage. Each point typically costs 1% of the loan amount and reduces the rate by a certain amount (often around 0.25 percentage points, though it varies by lender). By paying points at closing, you gain a lower monthly payment and pay less interest over the life of the loan. You can pay points with cash at closing or roll them into the loan; if you finance them, the loan amount increases and you’ll pay more interest overall, even with a lower rate. The decision to pay points depends on how long you expect to keep the loan—if you stay long enough to recoup the upfront cost through lower payments, points can be worthwhile; if you might refinance or sell soon, they may not be worth it.