Understanding Discount Points in Tennessee Real Estate

If the purchase price of a home is $300,000 and the buyer puts $100,000 down while paying three discount points, how much will the discount points cost?

• A. $3,000
• B. $6,000
• C. $4,500
• D. $9,000

Answer: (B)

To determine the cost of the discount points in this scenario, it's important to understand what discount points are. Discount points are fees paid to lower the interest rate on a mortgage. Each discount point typically costs 1% of the total loan amount. In this case, the total purchase price of the home is $300,000, and the buyer is making a down payment of $100,000. This means the loan amount, which is the amount subject to discount points, will be the purchase price minus the down payment. Therefore, the loan amount is $300,000 - $100,000 = $200,000. Since the buyer is paying three discount points, we calculate the cost of those points as follows: 1. Each point costs 1% of the loan amount. 2. 1% of $200,000 equals $2,000. 3. Therefore, three points would be 3 * $2,000, which totals $6,000. Thus, the cost of the discount points comes out to $6,000, corroborating the choice that states this amount.

When stepping into the world of real estate, especially in Tennessee, understanding financial concepts is paramount. One topic that often raises eyebrows is discount points. You might be wondering, "What are discount points, and why should I care?" Let’s break it down—and trust me, it’s easier than it sounds!

First things first: discount points are fees that a borrower pays to lower the interest rate on their mortgage. Picture this: each point typically equals 1% of your mortgage amount. So, let’s say you’re looking at a house priced at $300,000. If you put down $100,000, your loan amount comes out to $200,000.

Now, if you decide to pay three discount points, here's what you're doing. You’re paying for that financial advantage of a lower interest rate, right upfront. Let’s calculate that. Since each point costs 1% of the loan amount, the calculation looks like this:

• 1% of $200,000 equals $2,000.

• If you buy three points, you simply multiply: 3 * $2,000 = $6,000.

So, that’s how we arrive at the cost of three discount points being $6,000. It’s not rocket science, but the savings can be substantial over the life of your loan—especially with interest compounding.

This understanding isn’t just handy for passing the state real estate exam but is truly vital for making informed decisions as a buyer. You might be asking yourself, "How can I apply this knowledge practically?" Well, consider this: saving even a slight percentage on your interest rate can lead to thousands of dollars saved over the lifetime of a mortgage. And who wouldn’t want to keep more money in their pocket?

Moreover, the ability to grasp these concepts not only sets you up for exam success but prepares you for real-world scenarios when you're navigating the housing market. It’s those little nuggets of knowledge that make you not just a good applicant, but a stellar real estate agent.

You see, whether you’re studying for the Tennessee Realtor State Exam or just brushing up on your financial knowledge, understanding discount points lays a solid foundation for a successful career in real estate. Remember, the more you know, the better equipped you are to advise clients in a complex market. So, keep pressing on—your future clients (and your bank account) will thank you for it!