Which formula correctly calculates the cost of discount points?

The correct answer reflects the formula used to determine the cost of discount points in a mortgage transaction. This formula states that the cost of discount points is calculated by multiplying the loan amount by the discount points expressed as a percentage.

Discount points are fees that borrowers can pay at closing to reduce the interest rate on their mortgage. Each point typically costs 1% of the loan amount and can lower the interest rate, resulting in a more affordable monthly payment over the life of the loan. By using the formula in the correct answer, you accurately assess how much these points will cost based on the size of the loan and the chosen discount points.

Understanding the context of the components involved helps clarify why the formula is structured this way. This approach allows borrowers and lenders to effectively calculate the immediate upfront cost associated with purchasing discount points, helping in decision-making regarding mortgage financing options.