Question

Shelly plans to take a 30-year and fixed-rate mortgage with the amount of $100,000 mortgage. The interest rate is 3%, so monthly payment for both principal and interest is $421 per month. Shelly can considering purchasing three discount points,so interest rate would be 2.75%. Purchasing the three discount points would cost $3,000 but reduce the payment to $382 per month.Are mortgage points worth it? Please elaborate ( 2 points)

Answer 1

After calculating the savings over the 30-year life of the mortgage, purchasing the three discount points would save Shelly $11,040 after accounting for the initial $3,000 cost. Therefore, buying the points seems to be a financially beneficial decision in the long term.

Step-by-step explanation:

To determine if mortgage points are worth it for Shelly, we must calculate the savings over the life of the loan. With an interest rate of 3%, her monthly payment amounts to $421, whereas buying three discount points reduces the rate to 2.75% and her payment to $382 per month. The cost of the points is $3,000.

First, calculate the total payments without points:

• Without points: $421 * 12 months * 30 years = $151,560

Next, calculate the total payments with points:

• With points: $382 * 12 months * 30 years = $137,520

Now, subtract the cost of the points from the savings to see the net benefit:

• Savings with points: $151,560 - $137,520 = $14,040
• Net savings: $14,040 - $3,000 (cost of points) = $11,040

In this case, the points save Shelly $11,040 over the life of the loan. So, buying the discount points would be financially beneficial in the long term.

Answer 2

Discount points are fees paid upfront to reduce the interest rate on a mortgage. Shelly can reduce her monthly payment by purchasing three discount points for $3,000. Whether mortgage points are worth it depends on how long Shelly plans to stay in the house.

Step-by-step explanation:

Discount points are fees paid to the lender upfront in exchange for a lower interest rate on the mortgage. In Shelly's case, purchasing three discount points for $3,000 would reduce the interest rate from 3% to 2.75%. This would lower her monthly payment from $421 to $382.

To determine whether mortgage points are worth it, Shelly needs to calculate the break-even point. The break-even point is the number of months it takes for the savings from the lower monthly payment to equal the upfront cost of the discount points.

1. Without discount points: Monthly payment = $421, Total cost over 30 years = $421 x 12 months x 30 years = $151,320
2. With discount points: Monthly payment = $382, Total cost over 30 years = $382 x 12 months x 30 years - $3,000 = $137,520

The savings in total cost with discount points is $151,320 - $137,520 = $13,800. The break-even point would be $3,000 divided by the monthly savings of $421 - $382 = $39. Therefore, if Shelly plans to stay in the house for longer than 39 months, purchasing the three discount points would be worth it.