PSI Virginia Real Estate Practice Exam

What are points in the context of a mortgage?

1. A type of loan guarantee

2. Extra charges paid to lower interest rates

3. A measure of property worth

4. Fees associated with closing a sale

The correct answer is: Extra charges paid to lower interest rates

In the context of a mortgage, points refer specifically to extra charges paid upfront to lower the interest rate on the loan. This practice is commonly known as "buying down the rate." Each point typically represents 1% of the loan amount and is paid at closing. By paying points, borrowers can reduce their monthly mortgage payments and, ultimately, the total interest paid over the life of the loan. For example, if a borrower has a $200,000 loan, one point would cost $2,000 at closing. In return, this upfront payment can result in a lower interest rate, which can lead to significant savings over time. The decision to pay points is often a weighing of immediate versus long-term costs, with individuals assessing how long they plan to stay in the home against the overall savings on interest. While the other options reference important aspects of real estate transactions, they do not capture the specific financial mechanism represented by points in mortgage agreements. A type of loan guarantee and fees associated with closing are distinctly different terms that do not correlate with the concept of points. Similarly, a measure of property worth refers to appraisals or market evaluations, which is not related to how points function in securing a mortgage.