Discount points charged by a lender on a loan are a percentage of which amount?

• A. The interest rate
• B. The loan amount
• C. The down payment
• D. The monthly payment

Answer: (B)

Discount points are prepaid interest paid to the lender at closing to lower the loan’s interest rate. They are calculated as a percentage of the loan amount, not of the down payment or the monthly payment. One point equals 1% of the loan amount, so a $300,000 loan would have points costing $3,000 per point. The exact rate reduction from paying points varies by loan and lender, but the cost basis for points is always the loan amount, which is why the correct choice is the loan amount.