30. A buyer is purchasing a $500,000 property with an 80% loan to value. If the lender charges 3.5 discount points, how much would a borrower pay for the points?
Answer: C
The borrower would pay $14,000 for the points.
To calculate the cost of the discount points, first determine the loan amount, which is 80% of the property value. In this case, the loan amount is $400,000 (80% of $500,000). Since the lender charges 3.5 discount points, the total cost for the points is $14,000 (3.5% of $400,000).
A) $1,400
This option is incorrect because it represents only 0.35% of the loan amount, which does not accurately reflect the cost of 3.5 discount points. The calculation should involve multiplying the loan amount by 3.5%, resulting in a significantly higher figure.
B) $1,750
This choice is also incorrect. This amount represents 1.75% of the loan amount, which is still not reflective of the 3.5 discount points charged by the lender. The correct calculation must consider the total points percentage against the actual loan amount.
C) $14,000
This is the correct answer, as it accurately calculates the cost of the points. By taking 3.5% of the loan amount ($400,000), the borrower would indeed pay $14,000 for the discount points, aligning perfectly with the problem's specifications.
D) $17,500
This option is incorrect as it indicates 4.375% of the loan amount, which exceeds the stated 3.5 points. The calculation should strictly adhere to the 3.5% rate to determine the accurate cost for the points.
Conclusion
The correct answer, $14,000, is derived from the proper application of the discount points calculation based on the loan amount. All other options either underestimate or overestimate the required payment for the points, demonstrating a misunderstanding of how discount points function in relation to the loan amount.