Tennessee Realtor State Practice Exam

Which of the following best describes a point in the context of a mortgage?

1. A fee charged per month by the lender

2. An amount paid to the seller

3. One percent of the loan amount

4. A flat fee for processing

The correct answer is: One percent of the loan amount

In the context of a mortgage, a point refers to one percent of the loan amount. This financial term is commonly used in the real estate industry to describe points that may be charged by lenders as a way to assess fees or to buy down the interest rate on a mortgage loan. When a borrower pays points at closing, they are essentially prepaying interest on their loan, which can result in a lower interest rate over the life of the mortgage. For example, if a borrower takes out a $200,000 loan and agrees to pay one point, they would pay $2,000 at closing. This practice can benefit borrowers who plan to stay in their home for an extended period as it may lead to significant savings in interest payments over time. Considering the other options, they describe different fees or aspects related to mortgage transactions but do not accurately define what a point is in this context. A monthly fee charged by the lender pertains to the ongoing payments for the loan, an amount paid to the seller is related to the purchase transaction rather than the specifics of mortgage financing, and a flat fee for processing refers to administrative fees rather than a percentage of the loan amount. Understanding points is crucial for obtaining the best financing terms and evaluating the overall cost of