When calculating fees for a loan, what is typically referred to as a "discount point"?

A "discount point" is typically defined as a fee that borrowers can pay upfront to lower their mortgage interest rate, and it is specifically calculated as 1% of the loan amount. This practice provides borrowers with the opportunity to reduce their long-term borrowing costs in exchange for an initial payment at closing. For instance, if a borrower takes out a loan of $200,000 and pays two discount points, they would pay $4,000 at closing to potentially gain a lower interest rate, which can result in significant savings over the life of the loan.

The structure of discount points allows lenders to offer lower rates to borrowers willing to make this upfront investment, making it a common practice in securing a mortgage. This approach benefits both lenders, who receive immediate cash for the points paid, and borrowers, who can achieve lower monthly payments through reduced rates.

In contrast, the other choices do not accurately reflect what a discount point is:

• A flat fee deducted from the borrower's income does not relate to loan fees or interest rates.

• A fee solely for credit checks is a distinct cost altogether and does not impact the interest rate or points paid on a loan.

• A percentage of the property value typically refers to the down payment or possibly closing costs,