Question

Leonard is evaluating a $400,000 mortgage. He can get a 30-year 6 percent fixed-rate mortgage with principal and interest payments of $2,398.20 with no points. He can also get a 5.75 percent mortgage loan (payments of $2,334.29) with two points. Using simple arithmetic, how many months will it take him to break even on the lower interest rate loan?

Answer 1

Points are an upfront charge by the lender that is part of the price of a mortgage. Points are expressed as a percent of the loan amount, with 2 points being 2%. On a $400,000 loan,

solutions

Loan Amount $400,000

Loan Term (in months) 360 months

mortgage I mortgage II

Interest Rate 6.000% 5.750%

Points 0.00% 2.00%

Loan Payment Amount $2,398.20 $2,334.29

Costs Over 30 — Year Period

Points Paid in Cash $0 $8,000
`($400000×2÷100)`

Monthly Costs -

Principal and Interest $863,348 $840,340

Lost Interest

On Points $0 $0

On Monthly Costs $0 $0

Total Costs $863,348 $848,340

Reduction in Loan Balance $400,000 $400,000

Total Cost Offsets $400,000 $400,000

Cost Net of Offsets $463,348 $448,340

Conclusions - Based on a 30 Year Holding Period

Over the next 30 years the High Interest / Low Points Loan Will Save You: $15,008

In Months, the Break-even Point Occurs in 1 months

In Years, the Break-even Point Occurs in 0.0833 years