PSI Oklahoma Real Estate Practice Test

What are discount points used for in a loan?

1. To increase loan repayment time

2. To lower the yield on the loan

3. To increase market value

4. To reduce closing costs

The correct answer is: To lower the yield on the loan

Discount points are a tool used by borrowers to reduce the interest rate on their mortgage loan. Essentially, a discount point is a fee paid to the lender at closing, equal to 1% of the total loan amount. By paying these points upfront, borrowers can "buy down" the interest rate, resulting in lower monthly payments and overall interest expenses over the life of the loan. This makes option B the correct choice, as it clearly articulates the primary function of discount points in lowering the yield on the loan. It's also important to understand that the other options do not accurately reflect the purpose of discount points. For instance, increasing the loan repayment time is not a benefit of discount points; rather, they focus on the cost of borrowing and lowering interest rates. Similarly, while market value is influenced by many factors in real estate, discount points themselves do not directly affect the market value of a property. Reducing closing costs might seem related, but discount points actually represent an additional upfront cost, not a reduction. Thus, the use of discount points specifically relates to interest rates and overall loan yield, making option B the most accurate answer.