If a $120,000 loan has prepaid points totaling $2,400, how many discount points is the borrower paying?

• A. 1 point
• B. 2 points
• C. 3 points
• D. 4 points

Answer: (B)

Discount points are a way to pay interest upfront to lower the loan’s rate. Each point costs 1% of the loan amount. Here, the loan is $120,000 and prepaid points total $2,400. Since 1 point = 1% of the loan, 2,400 is 2% of 120,000 (120,000 × 0.02 = 2,400). Therefore the borrower is paying two discount points. For context, one point would cost $1,200 on this loan, two points cost $2,400, and three points would cost $3,600. The choice to pay points depends on how long you’ll keep the loan and whether the rate reduction justifies the upfront cost.