Question

Howard must decide if he will purchase discount points for his mortgage. Two discount points which cost 2% of the mortgage amount will result in a 0.5% decrease in the interest rate. The terms of the mortgage are shown below.

Howard's Mortgage $423,000 30 year fixed 4.5% annual rate 2 discount points M $2,143 28 5% annual rate 0 discount points M = $2.270 76




Howard plans to stay in his house for about five years. Should Howard purchase the two discount points? Explain your reasoning.

Answer 1

Howard should not purchase the 2 discount points

Explanation:

In order to determine whether or not Howard should purchase the 2 discount points,we need to ascertain costs to be incurred by Howard under the two scenarios such that the cheaper option can be recommended.

No discount purchase:

total payments for 5 years=$2,270.76*5*12=$136,245.60

The total repayment is $136,245.60

If 2 discount points is purchased:

total monthly repayments=$2,143.28*5*12=$128,596.8

The cost of 2 discount points=$423,000*2%=$8,460

Total cost if 2 discount points is purchased=$8,460 +$128,596.8=$137,056.80

The option to purchase 2 discount points is more expensive by $ 811.20

($137,056.80- $136,245.60)