You are buying a house and will borrow $190,000 on a 30-year fixed rate mortgage

Question

You are buying a house and will borrow $190,000 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 4.25 percent. Alternatively, she tells you that you can “buy down” the interest rate to 4.02 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?

whats max point?

Explanation / Answer

The per month payment on the loan at 4.25% APR would be = 190000/pvifa(4.25/12,360) = 190000/203.2769 = $934.69

The per month payment at 4.025 APR will be = 190000/pvifa(4.02/12,360) = 190000/208.9563 = $909.28

The difference in monthly payment = 934.69 - 909.28 = $25.41

The PV of this difference can be paid towards points upfront on the loan.

The amount would be 25.41*pvifa(4.02/12,360) = 25.41*208.9563 = $5309.58

So points upfront would be 5309.58/190000 = 2.79%

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