Nationwide Mortgage Licensing System (NMLS) Practice Exam

A discount point is BEST described as a charge the borrower pays to:

1. A lender to decrease the interest rate on the mortgage loan

2. A mortgage broker at the time of application to obtain a favorable rate

3. The seller as part of the closing costs of a loan

4. A lender to ensure against foreclosure

The correct answer is: A lender to decrease the interest rate on the mortgage loan

A discount point is best described as a charge that a borrower pays to a lender to decrease the interest rate on the mortgage loan. This financial mechanism allows borrowers to pay upfront to "buy down" the interest rate, which can lead to lower monthly payments over the life of the loan. Essentially, one discount point typically costs 1% of the loan amount and reduces the interest rate by a set percentage, often around 0.25%. This means that in exchange for paying these points upfront, borrowers benefit from lower interest costs, which can result in significant savings over time. In the context of mortgage financing, this option emphasizes the direct relationship between the borrower and the lender, focusing on the purpose of discount points – to adjust the cost of borrowing based on the borrower’s preferences and financial strategies.