Discount points are prepaid interest paid at closing to lower the loan's interest rate; paying them affects monthly payments and APR.

Discount points are prepaid interest paid at closing to lower the loan's interest rate; paying them affects monthly payments and APR.

• A. Discount points increase the interest rate.
• B. Discount points decrease the interest rate and reduce the monthly payment while increasing upfront costs.
• C. Discount points have no effect.
• D. Discount points increase the annual percentage rate.

Answer: (B)

Discount points are prepaid interest paid at closing to lower the loan’s interest rate. When you pay points, you commit more cash up front in exchange for a lower rate. That lower rate reduces the monthly payment because interest is calculated on a smaller rate over each payment period. At the same time, you’re increasing your upfront costs by the amount paid in points. Because APR incorporates not only the interest rate but also these upfront costs, paying points changes the APR as well (the exact change depends on how many points are paid and the loan terms). So the idea that points lower the rate, reduce monthly payments, and raise upfront costs captures the correct behavior.

Discount points are prepaid interest paid at closing to lower the loan’s interest rate. When you pay points, you commit more cash up front in exchange for a lower rate. That lower rate reduces the monthly payment because interest is calculated on a smaller rate over each payment period. At the same time, you’re increasing your upfront costs by the amount paid in points. Because APR incorporates not only the interest rate but also these upfront costs, paying points changes the APR as well (the exact change depends on how many points are paid and the loan terms). So the idea that points lower the rate, reduce monthly payments, and raise upfront costs captures the correct behavior.