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Debbie is considering purchasing a new home for $250,000 by borrowing 80% of the purchase price....

Debbie is considering purchasing a new home for $250,000 by borrowing 80% of the purchase price. She has two financing options:

  • Option 1: Fixed rate mortgage over 30 years at 5.15% interest, zero points
  • Option 2: Fixed rate mortgage over 30 years at 4.70% interest, plus two discount points

How long (in months) would her financial planner recommend that she live in the house to justify Option 2? Assume that the discount points are not included in the mortgage but paid upfront.

Please write your answer in terms of the number of months

Solutions

Expert Solution

Loan amount= Cost*80%= $250,000*80% = $200,000.

Monthly interest rate in option 1 = 5.15%/12 = 0.429167%

In option 2, discount points are paid separately and monthly payments are calculated on the loan amount of $200,000.

Number of monthly payments required for option 2 so as to have the same effective interest of option 1 is 433.89, rounded to 434 months.

Calculation as below:

jeff jeffy answered 1 year ago
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