Question

Barry and Bernice have obtained a 30-year, fixed rate mortgage for $635,250 with a 7.35% interest rate. They purchased 2 points and their rate is now 6.925%. Factoring in the cost of points, when is the break-even point on their mortgage?

Answer 1

Not sure what "break-even" means here. Do you mean, was it worth it to purchase the points?

Answer 2

That is the way the problem was given!

Answer 3

Let me put it this way: have you been studying mortgages, or is this some random Algebra problem?

Answer 4

This is a finance class

Answer 5

So if you borrow X dollars at R percent for Y years, isn't there a standard formula?

Answer 6

So if we have two rates, one with points and one without, at some point the cost (in terms of interest paid + points paid) will cross, right?

Answer 7

The up-front cost of paying the points is 2% of 635,250 = 12,705
Then you set up the interest paid per month and cumulative for the two trajectories, one with rate = 7.35 and one with rate 6.925. And then you find out which month the savings in interest at 6.925 makes up for cost of the points. Right?

Answer 8

Barry and Bernice have obtained a 30-year, fixed rate mortgage for $635,250 with a 7.35% interest rate. They purchased 2 points and their rate is now 6.925%. Factoring in the cost of points, when is the break-even point on their mortgage?

2 years, 11 months

3 years, 11 months

5 years, 10 months

2 years, 4 months

Answer 9

its a multiple choice problem

Answer 10

I don't know the mortgage math that well. Formula attached is from wikipedia. Probably hat I would do is set it up in Excel and then find the month in which the excess interest paid without points is equal to the cost of the points.

Answer 11

We could guess!

Answer 12

The difference is 0.35 + 0.075 = 0.425. Right

Answer 13

So the excess cost is
0.425 per year times 635,250
figure it out per month
and we want that equal to the cost of the points. OK?

Answer 14

OK