You are buying a house and will borrow $220,000 on a 25-year fixed rate mortgage

Question

You are buying a house and will borrow $220,000 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 4.50 percent. Alternatively, she tells you that you can “buy down” the interest rate to 4.30 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.)

Explanation / Answer

1st Alternative

Monthly Payment = pmt(rate,nper,pv,fv)

rate = 4.50%/12 = 0.375%

nper = 25*12 = 300

pv = 220000

fv = 0

Monthly Payment = pmt(0.375%,300,-220000,0)

Monthly Payment = 1222.83

2nd Alternative

Loan Amount = pv(rate,nper,pmt,fv)

rate = 4.30%/12

nper = 300

pmt = 1222.83

fv = 0

Loan Amount = pv(4.30%/12,300,1222.83,0)

Loan Amount = $ 224,561.35

The most points you would be willing = (224561.35 - 220000)/224561.35 *100

The most points you would be willing = 2.031%

Answer

The most points you would be willing = 2.031%

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