Question

After securing a home loan for $120,000, Lucinda would like to reduce the interest rate on the loan at the time of closing. Her initial interest rate is 7%. She has an additional $ 4,800 to put toward mortgage points, which are each $1,200. What will her new interest rate be?

Answer 1

Answer: Lucinda's new interest rate after purchasing 4 points will be 6%.

Step-by-step explanation: Lucinda has $4,800 to put towards mortgage points, and each point costs $1,200. So, Lucinda can purchase 4 points (4,800 / 1,200 = 4). Each point typically lowers the interest rate by 0.25%. Since Lucinda is purchasing 4 points, the interest rate will be reduced by 1% (4 points x 0.25% per point = 1%). Her initial interest rate is 7%, so by subtracting 1% from it, her new interest rate will be 6%.