Question

Purchasing discount points is a decision which can be financially justified or not justified. Create a unique example where purchasing discount points is not justified, solve the problem, and explain why the decision isn’t justified. @jim_thompson5910

Answer 1

how far did you get?

Answer 2

well in trying to create a problem i tried to create one where this individual bought a house and make renovations

Answer 3

what does it mean to buy discount points?

Answer 4

well first we must understand what are discount points

Answer 5

which discount points to me are fees paid directly to the lender at closing in exchange for a reduced interest rate

Answer 6

very good

Answer 7

that's the general idea

the specifics are this

"Each discount point generally costs 1% of the total loan amount and depending on the borrower, each point lowers your interest rate by one-eighth to one one-quarter of your interest rate.

Source: http://www.investopedia.com/terms/d/discountpoints.asp

Answer 8

On that same page, it says "Borrowers gain the benefit of lowered interest payments down the road, but the benefit applies only if the borrower plans on holding onto the mortgage long enough to save money from the decreased interest payments"

So if the person plans to stay with the mortgage for say 15 to 30 years, then it makes sense to pay for discount points. The borrower will pay less in interest overall.

However, if the borrower is just going to flip the property in a short amount of time (say 1, 2 or 3 years maybe), then it is not beneficial to pay extra for discount points.

Answer 9

this page

http://themortgagereports.com/13644/discount-points-for-mortgages-explained-in-plain-english

also explains

"The decision to pay discount points or receive them is a personal one, and one which will depend on your individual loan and your circumstances. If you're planning to move within the few years, paying points could be a losing gamble; you may never reach your breakeven."

Answer 10

So the post above would be my problem @jim_thompson5910

Answer 11

both basically are saying the same thing

Answer 12

the longer you hold onto the loan, the more valuable discount points are

Answer 13

so what can i create for a real world scenario

Answer 14

I'm not sure about the very technical specifics, but you can probably be flexible with that part

Answer 15

oh

Answer 16

can you help me create one

Answer 17

why don't you come up with one and let's see if it will work or not. Don't worry about it being realistic. We'll work out those details later.

Answer 18

ok so Jamie has boughten a house for about 275000

Answer 19

you would use "bought" instead of "boughten"

Answer 20

but so far, so good

Answer 21

right

Answer 22

what else?

Answer 23

um but over the past year it seems as though she decided that she would like to make renovations

Answer 24

I am trying to make scenario where you buy a house, "fix it up" and then sell it, and you want to do this in one year. In such a case, the points will cost more than the interest saved.

Answer 25

@jim

Answer 26

one sec while I think

Answer 27

???

Answer 28

I'm looking over a table, one moment

Answer 29

ok I got it (at least I think I do)

Answer 30

Let's say that "one year" is pushed back to "three years". Does that sound good?

Answer 31

Ok

Answer 32

ok I'm using a bank calculator to calculate the mortgage payments and how much is paid total for the three years

I'm using this here

http://www.bankrate.com/calculators/mortgages/mortgage-loan-points-calculator.aspx

Answer 33

here's what I typed in (see attached)

Answer 34

Then when I clicked "view report" I got this

Answer 35

For the loan with points, we have

"Total payments (principal & interest) = $47,264.04 after 3 years"

and for the loan without points, we have

"Total payments (principal & interest) = $49,158.72 after 3 years"

do you see this?

Answer 36

Yes

Answer 37

so it appears that we save about $2000 when we buy points

BUT we need to add the $5,500 of closing costs to the total amount of payments to get the true total cost

47,264.04 + 5500 = 52,764.04

Answer 38

ok

Answer 39

So if you buy points, then the total cost after 3 years is $52,764.04

Answer 40

if you don't buy points, the total cost is $49,158.72 after 3 years

Answer 41

It says to explain why this problem is not justified?

Answer 42

so for this short term scenario of 3 years, it costs more to buy points

Answer 43

it's not justified because it costs more

Answer 44

ok

Answer 45

it only costs less when you extend it out for longer a term (say 15 years or 30 years)

Answer 46

ok

Answer 47

if i could give you more than one medal i would because you were such an awesome help

Answer 48

I'm glad I could help