You are buying a house and will borrow $225,000 on a 30-year fixed rate mortgage

Question

You are buying a house and will borrow $225,000 on a 30-year fixed rate mortgage with monthly payments to finance the purchase. Your loan officer has offered you a mortgage with an APR of 4.55 percent. Alternatively, she tells you that you can “buy down” the interest rate to 4.35 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? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.164.

Maximum Points: __________

You are buying a house and will borrow $225,000 on a 30-year fixed rate mortgage with monthly payments to finance the purchase. Your loan officer has offered you a mortgage with an APR of 4.55 percent. Alternatively, she tells you that you can “buy down” the interest rate to 4.35 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

To answer this, we first need to find out the difference created by interest deduction and then compare it with the benefits received.

Formula: Pmt = Lr / (1-(1+r)-t)

Without buy down

= [$225,000*(0.0455/12)]/[((1-((1+(0.0455/12))-360] = $1,146.74

With buy down

= [$225,000*(0.0435/12)]/[((1-((1+(0.0435/12))-360] = $1,096.33

Difference in PMT => $1,146.74 - $1,096.33 = $50.41
Total possible savings = $50.41 x 360 = $18,147.61

Cost per point = $225,000 x 1% = $2,250

Maximum Points = $18,147.61/$2,250 = 8.065 or 8

So, maximum points that can be bought down is 8.

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