Answer:
The amount by which her monthly payment will be lower if she purchases the points is $57.12.
Step-by-step explanation:
Since Alana will make a 20% down payment, the mortgage loan balance can be calculated as follows:
Mortgage loan balance = Mortgage amount – Down payment = $160,000 – ($160,000 * 20%) = $160,000 - $32,000 = $128,000
The amount by which her monthly payment will be lower if she purchases the points can now be calculated using the following steps:
Step 1: Calculation of monthly payment without purchasing 3 points
The monthly payment can be calculated using the formula for calculating loan amortization as follows:
P = (A * (r * (1 + r)^n)) / (((1+r)^n) - 1) .................................... (1)
Where,
P = monthly payment without purchasing 3 points = ?
A = Mortgage loan balance = $128,000
r = monthly interest rate = 4.9% / 12 = 0.049 / 12 = 0.00408333333333333
n = number of payment months = 30 years * 12 months = 360
Substituting all the figures into equation (1), we have:
P = ($128,000 * (0.00408333333333333 * (1 + 0.00408333333333333)^360)) / (((1 + 0.00408333333333333)^360) - 1)
P = $679.33
Step 2: Calculation of monthly payment if she purchases 3 points
Typically, each points purchased reduces the interest rate by 0.25%. Since Alana is considering a purchase of 3 points, her new interest rate can then be calculated as follows:
New interest rate = 4.9% - (0.25% * 3) = 4.9% - 0.75% = 4.15%
The monthly payment can also be calculated using the formula for calculating loan amortization as follows:
P3 = (A * (r * (1 + r)^n)) / (((1+r)^n) - 1) .................................... (2)
Where,
P3 = monthly payment if 3 points is purchased = ?
A = Mortgage loan balance = $128,000
r = new monthly interest rate = 4.15% / 12 = 0.0415 / 12 = 0.00345833333333333
n = number of payment months = 30 years * 12 months = 360
Substituting all the figures into equation (2), we have:
P3 = ($128,000 * (0.00345833333333333 * (1 + 0.00345833333333333)^360)) / (((1 + 0.00345833333333333)^360) - 1)
P3 = $622.21
Step 3: Calculation of the amount by which her monthly payment will be lower if she purchases the points
This can be calculated as follows:
Amount of reduction = P - P3 = $679.33 - $622.21 = $57.12
Therefore, the amount by which her monthly payment will be lower if she purchases the points is $57.12.
