Discount points in real estate financing are best described as:

• A. Monthly fees for processing
• B. Prepaid interest to lower the interest rate
• C. Attorney's fees
• D. Insurance premium

Answer: (B)

Discount points are prepaid interest paid at closing to lower the loan’s interest rate. Each point typically equals 1% of the loan amount, and paying points buys down the rate, which lowers the monthly principal and interest payment. The trade-off is upfront cost versus long-term savings: you pay more at closing but may reduce your monthly payment and total interest over the life of the loan. The decision depends on how long you plan to keep the loan—the longer you keep it, the more likely you are to recoup the upfront cost.

This isn’t the same as monthly processing fees, attorney’s fees, or an insurance premium, which are separate costs or ongoing charges rather than a mechanism to lower the rate.