Question

The buyer of a piece of real estate is often given the option of buying down the loan. This option gives the buyer a choice of loan terms in which various combinations of interest rates and discount points are offered. The choice of how many points and what rate is optimal is often a matter of how long the buyer intends to keep the property.

Darrell Frye is planning to buy an office building at a cost of $986,000. He must pay 10% down and has a choice of financing terms. He can select from a 9% 30-year loan and pay 4 discount points, a 9.25% 30-year loan and pay 3 discount points, or a 9.5% 30-year loan and pay 2 discount points. Darrell expects to hold the building for four years and then sell it. Except for the three rate and discount point combinations, all other costs of purchasing and selling are fixed and identical. (Round your answers to the nearest cent. Use this table, if necessary.)

(a)

What is the amount being financed?

$

(b)

If Darrell chooses the 4-point 9% loan, what will be his total outlay in points and payments after 48 months?

$

(c)

If Darrell chooses the 3-point 9.25% loan, what will be his total outlay in points and payments after 48 months?

$

(d)

If Darrell chooses the 2-point 9.5% loan, what will be his total outlay in points and payments after 48 months?

$

(e)

Of the three choices for a loan, which results in the lowest total outlay for Darrell after 48 months?

the 4-point 9% loan the 3-point 9.25% loan     the 2-point 9.5% loan

Answer 1

(a)What is the amount being financed?

Amount to be Financed = Price * (1 - Down Payment) = 986000 * 0.90 = $887400

(b) If Darrell chooses the 4-point 9% loan, what will be his total outlay in points and payments after 48 months?

Monthly Payment = Loan / PVAF(0.09/12,360)

Monthly Payment = $887400 / 124.28 = $7140.22

total outlay = Monthly Payment * 48 M + Points

total outlay = 7140.22 * 48 M + 887400 * 0.04

total outlay = $378226.61

(c) If Darrell chooses the 3-point 9.25% loan, what will be his total outlay in points and payments after 48 months?

Monthly Payment = Loan / PVAF(0.0925/12,360)

Monthly Payment = $887400 / 121.55 = $7300.42

total outlay = Monthly Payment * 48 M + Points

total outlay = 7300.42 * 48 M + 887400 * 0.03

total outlay = $377042.24

(d) If Darrell chooses the 2-point 9.5% loan, what will be his total outlay in points and payments after 48 months?

Monthly Payment = Loan / PVAF(0.095/12,360)

Monthly Payment = $887400 / 118.93 = $7461.74

total outlay = Monthly Payment * 48 M + Points

total outlay = 7461.74 * 48 M + 887400 * 0.02

total outlay = $375911.53

(e) Of the three choices for a loan, which results in the lowest total outlay for Darrell after 48 months?

the 2-point 9.5% loan (Because it has lowest total outlay)

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