Loan Officer Practice Exam

Which option allows a borrower to pay more upfront costs in exchange for a lower interest rate?

1. Discount points

2. Yield spread premium

3. Lender credits

4. Lock-in agreement

The correct answer is: Discount points

The option that allows a borrower to pay more upfront costs in exchange for a lower interest rate is discount points. When a borrower chooses to purchase discount points, they essentially pay a percentage of the loan amount upfront to reduce their interest rate over the life of the loan. This can be a strategic move for borrowers who plan to stay in their home for a longer period, as the initial investment can lead to significant savings in interest payments over time. Discount points can lower monthly mortgage payments, making homeownership more affordable in the long run. This financial strategy is particularly beneficial for those who have the means to pay higher closing costs at the outset in exchange for long-term interest savings. Other options listed, such as yield spread premium, lender credits, and lock-in agreements, do not operate under the same premise of paying upfront costs for a reduced interest rate, but rather involve different structures and conditions in the mortgage process.