Affiliate Broker Tennessee (TN PSI) National Practice Exam `

What does Leonard's choice to pay points up front to reduce his interest rate exemplify?

1. Origination points

2. Discount points

3. Service points

4. Prepaid interest

The correct answer is: Discount points

Leonard's choice to pay points up front to reduce his interest rate exemplifies discount points. This practice involves the borrower paying a fee at the closing of the loan, with each point typically equal to 1% of the loan amount, to lower the ongoing interest rate. By doing so, the borrower can reduce their monthly mortgage payments, which can lead to substantial savings over the life of the loan. This strategy is often considered when a borrower plans to stay in the home long enough for the cost of the points to be recouped through the savings on interest. In contrast, origination points are fees charged by lenders to process the loan, service points relate to additional services provided during the loan process, and prepaid interest refers to interest paid in advance for a period before the first regular payment is due. These other concepts do not align with Leonard's specific strategy of paying points solely to lower the interest rate on his mortgage.