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Leonard is evaluating a $400,000 mortgage. He can get a 30-year 6 percent fixed-rate mortgage with principal and interest payments of $2,398.20 with no points. He can also get a 5.75 percent mortgage loan (payments of $2,334.29) with two points. Using simple arithmetic, how many months will it take him to break even on the lower interest rate loan?

Respuesta :

Points are an upfront charge by the lender that is part of the price of a mortgage. Points are expressed as a percent of the loan amount, with 2 points being 2%. On a $400,000 loan,

solutions  

Loan Amount                 $400,000  

Loan Term (in months)        360 months

                     mortgage I   mortgage II

Interest Rate                    6.000% 5.750%  

            Points                      0.00% 2.00%  

Loan Payment Amount $2,398.20 $2,334.29        

Costs Over 30 — Year Period

Points Paid in Cash                      $0               $8,000[tex]($400000×2÷100)[/tex]

Monthly Costs -

Principal and Interest             $863,348             $840,340

Lost Interest

On Points                                      $0                        $0

On Monthly Costs                         $0                        $0

Total Costs                                 $863,348              $848,340

Reduction in Loan Balance    $400,000               $400,000

Total Cost Offsets                   $400,000               $400,000

Cost Net of Offsets                  $463,348               $448,340

Conclusions - Based on a 30 Year Holding Period    

Over the next 30 years the High Interest / Low Points Loan Will Save You:   $15,008

In Months, the Break-even Point Occurs in   1 months

In Years, the Break-even Point Occurs in        0.0833 years

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