In an FHA loan, points equal what percentage of the loan amount?

• A. 0.5%
• B. 1%
• C. 2%
• D. 3%

Answer: (B)

Points are prepaid interest or fees expressed as a percentage of the loan amount. Each point equals 1% of the loan amount, so paying one point costs 1% of the loan. In FHA loans, borrowers may pay points to buy down the interest rate, which can lower monthly payments if the long-term savings outweigh the upfront cost. For example, on a $320,000 loan, one point would cost $3,200 upfront. The essential idea is that points translate to a percentage of the loan, specifically 1% per point.