Arizona State University (ASU) FIN380 Personal Financial Management Test 3 Practice

In the context of loans, "1 point" typically refers to 1% of the total loan amount. This is a standard definition used in the mortgage and finance industry. When a borrower pays points, they make an upfront payment that can be used to lower the interest rate on the loan or to cover other costs associated with the loan origination.

For instance, if someone takes out a loan of $100,000, paying 1 point would mean they pay $1,000 upfront. This cost can be significant as it affects the overall cost of borrowing, allowing borrowers to evaluate whether it is beneficial for them to pay these points to secure a lower interest rate over the life of the loan.

The other choices represent misunderstandings of what a point signifies in financial terms. While percentages of the loan amount can vary, in this specific context, only the option that states 1% accurately reflects the industry standard for one point. This highlights the fundamental principle of calculating points in financing and their role in improving loan conditions.