Florida Real Estate Sales Associate Examination Content OutlineReal Estate FinanceMedium
A borrower is applying for a loan and the lender is quoting an interest rate of 5.5%. To reduce the monthly payment, the borrower decides to pay two discount points at closing. If the loan amount is $300,000, what is the effective interest rate after paying the discount points, assuming each point reduces the interest rate by 0.125%?
- A5.125%
- B5.375%
- C5.000%
- D5.250%
Show answer & explanationAnswer & explanation
Correct answer: D. 5.250%
Each discount point reduces the interest rate by 0.125%. With two discount points, the total reduction is 2 * 0.125% = 0.250%. Subtracting this from the quoted rate: 5.5% - 0.250% = 5.250%.
Why the other options are wrong
- A. This would be the rate if 3 points were paid, or if each point was 0.1875%.
- B. This would be the rate if only one point was paid, or if each point was 0.0625%.
- C. This would be the rate if 4 points were paid, or if each point was 0.25%.
Discount Points
Upfront fees paid to the lender at closing in exchange for a lower interest rate over the life of the loan.
- One point equals 1% of the loan amount
- Reduces the interest rate (buys down the rate)
- Can be tax deductible
Memory trick: Points 'Pinch' the rate down.