You are buying a house and will borrow $210,000 on a 25-year fixed rate mortgage

Question

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.

Explanation / Answer

Installment when the interest rate is 4.40 = $1155.36

Installment at interest rate 4.15 = $1125.92

Point loan amount = 1%* 210000 = 2100

Savings in the period of 25 years = (1155.36 – 1125.92) * 25 = 29.44 * 25 = 736

The investor should only be willing to pay the point loan when the period of repayment is extended is decreased to a period of 36 – 48 months or the investment is has a higher rate of interest attached to the property for example at a rate of 9% when the point is being offered at 8.75.

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