Massachusetts Real Estate License Practice Test

What do points or discounts refer to in mortgage transactions?

1. Fees charged for processing loans

2. Pre-paid interest calculated as a percentage of the loan

3. Closing costs associated with real estate transactions

4. Monthly payments on principal and interest

The correct answer is: Pre-paid interest calculated as a percentage of the loan

Points or discounts in mortgage transactions specifically refer to pre-paid interest that is calculated as a percentage of the loan amount. When a borrower decides to pay points at closing, they are essentially choosing to pay interest upfront to lower the interest rate for the duration of the loan. Each point typically equals 1% of the loan amount, and paying points can be beneficial for borrowers who plan to stay in the property for a longer period, as it allows them to save on interest payments over the life of the loan. In contrast, the other choices describe different aspects of mortgage transactions. Fees charged for processing loans are separate from points or discounts, as those are typically referring to additional costs incurred during the application and approval process. Closing costs encompass a broader category of fees beyond just points, including appraisals, inspections, and legal fees. Monthly payments are related to the regular installment amounts that cover both principal and interest but do not pertain to the concept of paying points or discounts upfront to modify the interest rate.