42. A borrower pays $200,000 for a home. The buyer makes a down payment of $40,000 and obtains a loan for the balance of the purchase price. The lender charges 4 discount points for the loan. How much will the borrower pay in discount points?
Answer: C
The borrower will pay $6,400 in discount points.
To calculate the discount points, we take the loan amount, which is the purchase price minus the down payment. In this case, the loan amount is $200,000 - $40,000 = $160,000. Since the lender charges 4 discount points, we calculate 4% of $160,000, resulting in $6,400.
A) $1,600
This amount represents 1% of the loan amount, which is not applicable in this scenario. The borrower is charged 4 discount points, not 1, making this option incorrect.
B) $4,000
This amount is equivalent to 2.5% of the loan amount ($160,000), which does not correspond to the 4 discount points charged. Thus, this option is incorrect.
C) $6,400
This is the correct calculation based on the loan amount of $160,000. Calculating 4% of $160,000 gives us $6,400, which accurately reflects the cost of the discount points the borrower must pay.
D) $8,000
This figure is 5% of the loan amount, which is higher than the actual charge of 4 discount points. Therefore, this option is incorrect as it overestimates the discount points payable.
Conclusion
The correct answer is $6,400, as it accurately reflects the calculation of 4 discount points on the loan amount of $160,000. All other options either underestimate or overestimate the cost based on the percentage of points charged, demonstrating a misunderstanding of how discount points are computed in relation to the loan amount.