Madison is financing $382,300 to purchase a house. How much money will she save over the life of a 30-year, fixed-rate loan by buying 3 points with a rate of 5.13% instead of not buying points with a rate of 5.88%? Round to the nearest dollar.

A) $60,948
B) $63,242
C) $63,242
D) $53,302
(Not a typo)

Question

Madison is financing $382,300 to purchase a house. How much money will she save over the life of a 30-year, fixed-rate loan by buying 3 points with a rate of 5.13% instead of not buying points with a rate of 5.88%? Round to the nearest dollar.

A) $60,948
B) $63,242
C) $63,242
D) $53,302
(Not a typo)

anonymous · Answer

@jim_thompson5910

jim_thompson5910 · Answer

are you familiar with the concept of points in mortgages?

anonymous · Answer

Not a clue

jim_thompson5910 · Answer

points reduce the interest rate

anonymous · Answer

ok...

jim_thompson5910 · Answer

1 point usually reduces the interest rate by 1/4 of a percent or 1/8 of a percent

jim_thompson5910 · Answer

so if you don't buy any points up front, the interest rate is 5.88%

if you do buy 3 points, then the interest rate is 5.13%

jim_thompson5910 · Answer

each point is 1% of the mortgage amount

jim_thompson5910 · Answer

each point costs you 1% of the mortgage amount

anonymous · Answer

got it! so how do I solve this? in stupid words please :)

jim_thompson5910 · Answer

1% of $382,300 = 0.01*382,300 = 3,823

jim_thompson5910 · Answer

each point costs $3,823

jim_thompson5910 · Answer

but it looks like we're ignoring this cost for now

jim_thompson5910 · Answer

what is the monthly payment if...

mortgage amount = $382,300
number of years = 30
annual interest rate = 5.88%

anonymous · Answer

would I use the calculator from the bankrate website for mortgage?

jim_thompson5910 · Answer

yes

anonymous · Answer

ok good in that case, first payment I got 2,082.75

jim_thompson5910 · Answer

is that with the points? or without?

anonymous · Answer

it's with the points making the rate 5.13%

jim_thompson5910 · Answer

ok how about without the points

anonymous · Answer

Without the points making the rate 5.88% the payment is 2,262.67

jim_thompson5910 · Answer

I'm getting the same monthly payments

anonymous · Answer

ok. now what happens?

jim_thompson5910 · Answer

1 point costs 1% of the mortgage

how much does 3 points cost?

anonymous · Answer

3%?

jim_thompson5910 · Answer

take 3% of the mortgage

jim_thompson5910 · Answer

3% of $382,300 = ??

anonymous · Answer

yes and I got 11,469

jim_thompson5910 · Answer

With 3 points

Total Cost = (monthly payment)*(# of months) + (cost for points)

Total Cost = (2,082.75)*(360) + (11,469)

Total Cost = 761,259

jim_thompson5910 · Answer

With 0 points

Total Cost = (2,262.67)*(360)

Total Cost = 814,561.20

jim_thompson5910 · Answer

Amount you save = (total cost with 0 points) - (total cost with 3 points)

anonymous · Answer

and now I just subtract the two?

jim_thompson5910 · Answer

I'm ignoring the down payment because it's the same for both so they subtract and cancel off

anonymous · Answer

got it! I might have more later but for now thanks again! :)

anonymous · Answer

My Final Answer and Correct Answer!!
$53,302!

jim_thompson5910 · Answer

nice work