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NISA [10]
3 years ago
12

On April 1, year 1, Mary borrowed $130,000 to re-finance the original mortgage on her principal residence. Mary paid 1 points to

reduce her interest rate from 7% to 6%. The loan is for a 30-year period. How much can Mary deduct in year 1 for her points paid?
Business
1 answer:
Simora [160]3 years ago
4 0

Answer:

Mary can deduct $1,300 in year 1 for her points paid.

Explanation:

a) Data and Calculations:

April 1, Amount borrowed by Mary to refinance the original mortgage on her principal residence = $130,000

Payment of 1 points to reduce Mary's interest rate from 7% to 6% amounts to 1% of $130,000 = $1,300.

b) Mary paying 1 points is beneficial to her since her interest cost is reduced from 7% to 6%.  This implies that her total finance cost at the end of the 30-year period will be reduced.

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Answer:

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Explanation:

To calculate the one time fee, we take this as a perpetuity and calculate the value or price of the perpetuity based on the fututre cash flows discounted to today's price by a certain dicount rate.

The discount rate is taken as 8.5% which is also the market interests rate.

The formula for the value/price of the perpetuity is,

Value / Price = Cash flow / Discount rate

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Explanation:

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