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)**

**Please upvote**

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