Question

A property is purchased for $110,000. The lender provides a loan for $85,000. He offers a very attractive interest rate of 3% with 3 discount points. What did the lender charge for points?

Answer 1

Answer:

The lender charged $2,550 for the points.

Explanation:

Discount points is a type of prepaid fees that mortgage borrowers can purchase from the lenders that lowers the quantity of interest that the borrower will have to pay in the future. In general, the discount points costs 1% of the amount borrowed. A discount point usually lowers the loan interest amount to be paid by an one-eight to one-quarter of a percent.

To determine the charge for the points in our case above, we can express the discount charge points as shown;

D=R×L

where;

D=discount point charge

R=standard discount point rate

L=loan amount

In our case;

D=unknown

R=1%

L=$85,000

replacing;

D=(1/100)×85,000=$850

The lender charged $850 for one points.

Determine the total charge for all the points purchased using the expression below;

T=D×N

where;

T=total charge for all the points

D=charge per point

N=number of points purchased

In our case;

T=unknown

D=$850

N=3 points

replacing;

T=850×3=$2,550

The lender charged $2,550 for the points.