Question

1. A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at a rate of 5.5 percent with 2.25 points. How long must the owner stay in the house to make it worthwhile to pay the points if the payment saving is not invested?

Answer 1

There are two options and we need to evaluate both options.

Option 1

Loan Amount = 250000

Mortgage Rate = 6% = 0.50 per month

Years 30

Number of period = 12 months *30 Years = 360

PMT = 1498.87

Option 2

Loan Amount = 250000

Mortgage Rate = 5.50% = 0.45 per month

Number of period = 360

PMT = 1419.47

Points = 2.25% which means

250000*2.25% = 5625 as discount point fee upfront.

Option 2 savings per month in comparison to option 1 = 1498.87-1419.47 = 79.4

If savings is not invested then to accumulate cost of 5625 = 5625/79.40/12 = 5.90 years.

Answer 5.90 years.