Question

A credit union is offering a $425,000 30-year loan with an annual rate of 4.3% with 1.6 points or 3.8% with 1.95 points. If a borrower chooses the second loan, how many months will it take to recoup the additional cost in points?

Answer 1

To determine how many months it will take to recoup the additional cost in points for the second loan, we need to compare the monthly payments for the two loans.

Step-by-step explanation:

To determine how many months it will take to recoup the additional cost in points for the second loan, we need to compare the monthly payments for the two loans.

For the first loan, the monthly payment can be calculated using the formula for the present value of an annuity:

PV = PMT * (1 - (1 + r)^(-n)) / r

Where PV is the loan amount, PMT is the monthly payment, r is the monthly interest rate, and n is the total number of months.

For the second loan, we can calculate the monthly payment using the same formula, but with a different interest rate and loan amount taking into account the additional cost of points. By comparing the two monthly payments, we can determine the number of months it will take to recoup the additional cost in points.