Texas Real Estate Sales Agent ExamFinancingEasy
A borrower is reviewing their loan estimate and notices several fees associated with the loan. Which of the following closing costs is typically paid by the borrower to the lender to lower the interest rate on the loan?
- AAppraisal fee
- BOrigination fee
- CDiscount points
- DTitle insurance premium
Show answer & explanationAnswer & explanation
Correct answer: C. Discount points
Discount points are prepaid interest paid by the borrower to the lender at closing. Each point is typically 1% of the loan amount and is used to 'buy down' the interest rate.
Why the other options are wrong
- A. An appraisal fee pays for the property valuation and does not affect the interest rate.
- B. An origination fee is charged by the lender for processing the loan, not specifically to lower the interest rate.
- D. Title insurance protects against title defects and is not related to the interest rate.
Discount Points
Discount points are an upfront fee paid by the borrower to the lender at closing in exchange for a lower interest rate on the mortgage.
- Each point is usually 1% of the loan amount
- Used to 'buy down' the interest rate
- Can save money over the life of the loan
Memory trick: Points Discount Your Interest (PDI).