You are buying a house and will borrow 210000 on a 25year fi

You are buying a house and will borrow $210,000 on a 25-year fixed rate mortgage with monthly payments to finance the purchase. Your loan officer has offered you a mortgage with an APR of 4.40 percent. Alternatively, she tells you that you can “buy down” the interest rate to 4.15 percent if you pay points upfront on the loan. A point on a loan is 1 percent (one percentage point) of the loan value.

What are the most points you would be willing to pay to buy down the interest rate?

You are buying a house and will borrow $210,000 on a 25-year fixed rate mortgage with monthly payments to finance the purchase. Your loan officer has offered you a mortgage with an APR of 4.40 percent. Alternatively, she tells you that you can “buy down” the interest rate to 4.15 percent if you pay points upfront on the loan. A point on a loan is 1 percent (one percentage point) of the loan value.

As you are evaulating the mortgage, you also realize that you believe that you will only live in the house for 9 years before selling the house and buying another house. This means that in 9 years, you will pay off the remaining balance of the original mortgage.

Solution

Borrowing 210000 Tenure 25 years Period 300 APR 4.40% Monthly rate 0.37% Monthly repayment $1,155.36 Future value after 9 yrs $159,048.99 So for a 4.15% rate loan the PV of the cash flow at 4.15%/12 is the loan value PV $213,524.88 Max to be paid to bring down interest rate $3,524.88 Nos. of points 1.679 (3524.88/(210000*1%))