Question

Dominic considers buying 2 points on a 25-year, fixed rate mortgage for $187,600. His interest rate will be 5.45% if he does not purchase the
points. If he does purchase the points, his interest rate will decrease to 5.2%. What would be the break-even point on Dominic's mortgage
considering the cost of the points?

Answer 1

Answer:

If Dominic buys 2 points (2% of the loan value) he will get a better rate and hence less payment.  The question is asking how long will it take him to save the initial investment of 2% of the loan value due to a smaller payment.  The monthly payment at 5.45% is  $1,146.43,  the monthly payment for 5.2% is  $1,118.66.  This is a difference of  $27.77 per month.  The 2 points will cost him  $3,752.00.  The question is asking how long will it take Dominic to re-coup his  $3,752.00 if he saves $27.77 per month.  Just divide the 2 numbers and you get  135.10 months.  If you divide that by 12 you get 11.26 years, which is roughly 11 years, 4 months.

Step-by-step explanation:

Here is what the question is asking.  If Dominic buys 2 points (2% of the loan value) he will get a better rate and hence less payment.  The question is asking how long will it take him to save the initial investment of 2% of the loan value due to a smaller payment.  The monthly payment at 5.45% is  $1,146.43,  the monthly payment for 5.2% is  $1,118.66.  This is a difference of  $27.77 per month.  The 2 points will cost him  $3,752.00.  The question is asking how long will it take Dominic to re-coup his  $3,752.00 if he saves $27.77 per month.  Just divide the 2 numbers and you get  135.10 months.  If you divide that by 12 you get 11.26 years, which is roughly 11 years, 4 months.