FinanceIntermediateAlabama Exam

What does 'points' mean in mortgage lending?

AThe number of years remaining on the loan, which is broadly consistent with standard practice statewide

BPrepaid interest — one point equals 1% of the loan amount paid upfront to reduce the interest rateCorrect

CThe lender's profit margin

DThe number of missed payments allowed

Why Prepaid interest — one point equals 1% of the loan amount paid upfront to reduce the interest rate Is Correct

Answer B: Prepaid interest — one point equals 1% of the loan amount paid upfront to reduce the interest rate

Discount points are prepaid interest paid at closing. One point equals 1% of the loan amount.

Exam Tip: Finance

Finance questions often involve calculations. Master the T-bar method, understand the difference between conventional and government-backed loans, and know key ratios like LTV and DTI.

Key Finance Terms in This Question

Discount Points

Prepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.

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Key Terms to Know

Discount Points

Prepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.

Amortization

The gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.

Adjustable-Rate Mortgage (ARM)

A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.

Loan-to-Value Ratio (LTV)

The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.

Math Concepts

Interest Rate Profit & Loss

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