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

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- anonymous

@jim_thompson5910

- jim_thompson5910

are you familiar with the concept of points in mortgages?

- anonymous

Not a clue

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## More answers

- jim_thompson5910

points reduce the interest rate

- anonymous

ok...

- jim_thompson5910

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

- jim_thompson5910

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

each point is 1% of the mortgage amount

- jim_thompson5910

each point costs you 1% of the mortgage amount

- anonymous

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

- jim_thompson5910

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

- jim_thompson5910

each point costs $3,823

- jim_thompson5910

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

- jim_thompson5910

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

- anonymous

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

- jim_thompson5910

yes

- anonymous

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

- jim_thompson5910

is that with the points? or without?

- anonymous

it's with the points making the rate 5.13%

- jim_thompson5910

ok how about without the points

- anonymous

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

- jim_thompson5910

I'm getting the same monthly payments

- anonymous

ok. now what happens?

- jim_thompson5910

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

- anonymous

3%?

- jim_thompson5910

take 3% of the mortgage

- jim_thompson5910

3% of $382,300 = ??

- anonymous

yes and I got 11,469

- jim_thompson5910

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

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

- jim_thompson5910

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

- anonymous

and now I just subtract the two?

- jim_thompson5910

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

- anonymous

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

- anonymous

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

- jim_thompson5910

nice work

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