To lower the interest rate on a loan, the borrower is willing to pay two discount points. If the lender will loan the borrower 80% of the $200,000 purchase price, how much will discount points cost?

To lower the interest rate on a loan, the borrower is willing to pay two discount points. If the lender will loan the borrower 80% of the $200,000 purchase price, how much will discount points cost?

• A. $1,600
• B. $2,000
• C. $3,200
• D. $4,000

Answer: (C)

To determine the cost of the discount points, you first need to know the loan amount and how discount points are calculated. When a borrower pays discount points, each point is typically equal to 1% of the loan amount. In this scenario, the total purchase price is $200,000, and the lender is willing to loan 80% of that amount. To calculate the loan amount, you multiply the purchase price by 80%. Calculating 80% of $200,000 gives you: $200,000 x 0.80 = $160,000. Since the borrower is willing to pay two discount points, each point costing 1% of the loan amount means you’ll calculate: 2 points x 1% = 2% of the loan amount. Now you find 2% of $160,000: 2% of $160,000 = $160,000 x 0.02 = $3,200. Thus, the total cost of the discount points comes out to $3,200. This makes the choice of $3,200 the correct answer because it accurately reflects the total cost based on the loan amount and the percentage of the loan that the points represent.

To determine the cost of the discount points, you first need to know the loan amount and how discount points are calculated. When a borrower pays discount points, each point is typically equal to 1% of the loan amount.

In this scenario, the total purchase price is $200,000, and the lender is willing to loan 80% of that amount. To calculate the loan amount, you multiply the purchase price by 80%.

Calculating 80% of $200,000 gives you:

$200,000 x 0.80 = $160,000.

Since the borrower is willing to pay two discount points, each point costing 1% of the loan amount means you’ll calculate:

2 points x 1% = 2% of the loan amount.

Now you find 2% of $160,000:

2% of $160,000 = $160,000 x 0.02 = $3,200.

Thus, the total cost of the discount points comes out to $3,200. This makes the choice of $3,200 the correct answer because it accurately reflects the total cost based on the loan amount and the percentage of the loan that the points represent.