Loan Officer Practice Exam

What is the primary purpose of discount points in a mortgage?

1. To reduce the lender's fees

2. To lower the interest rate

3. To improve credit scores

4. To increase loan amounts

The correct answer is: To lower the interest rate

The primary purpose of discount points in a mortgage is to lower the interest rate. Borrowers can pay discount points upfront at closing in exchange for a reduced interest rate over the life of the loan. Each point typically costs 1% of the loan amount and often reduces the interest rate by a certain percentage, although this can vary depending on the lender and market conditions. This strategy can be particularly beneficial for borrowers who plan to stay in their homes for a longer period, as the lower rate can result in significant savings in interest payments over the life of the mortgage. By paying these points upfront, homeowners can effectively lower their monthly mortgage payments, making homeownership more affordable over time. While other options such as reducing the lender's fees, improving credit scores, or increasing loan amounts are important in the mortgage process, they do not relate directly to the function of discount points within the context of lowering the overall cost of borrowing through interest rate reduction.