Question

You have purchased a new home for $250,000 in want to obtain a conforming mortgage by putting down 20%.

Your mortgage provider offers you three alternatives:

A) a fixed-rate 30-year mortgage stress 9% with no points

B) a fixed rate 30 year mortgage at 8.25% with 2 points

C) A fixed rate 15 year mortgage at 7% with no points

What is the payment for mortgage B?

What is the breakeven period of time (in months) that you need to stay in the house for it to make sense for you to pay the points and take mortgage B instead of mortgage A?

Answer 1

1. EMI = [P x R x (1+R)^N]/[(1+R)^N - 1],

where P stands for the loan amount or principal,

R is the interest rate per month [if the interest rate per annum is 11%, then the rate of interest will be 11/(12 x 100)], and

N is the number of monthly installments

Also, 1 mortgage point = 1% of loan amount. The purchase of each point generally lowers the interest rate on your mortgage by up to 0.25%.

Purchase price	250000
Down payment	20%

For Mortgage B

(a) EMI for Mortgage B = $1503

(b) Cost of purchasing mortgage points = 2%*$200,000 = $4000

Amount saved in EMI per month (compared to Option A) = $1609.25 - $1502.53 = $106.74

Break-even months = $4000/$106.74 = 37 months

Option	Loan Amount	Interest rate	Tenure	Points	EMI
A	200000	9%	30	0	1609.25
B	200000	8.25%	30	2	1502.53
C	200000	7%	15	0	1797.66