Jasper Is Looking to Purchase a New Home for $250,000

question 93

Essay

Jasper is looking to purchase a new home for $250,000.He is paying $50,000 as a down payment on the home and financing the remaining $200,000 with a loan secured by the home.He has the option of (1)paying no discount points on the loan and paying interest at 6.5 percent or (2)paying one discount point on the loan and paying interest of 5.5 percent on the loan.Both options require Jasper to make interest-only payments for the first five years of the loan and to pay the loan principal over the 25 years after that (it is a 30-year loan).Jasper itemizes deductions irrespective of any interest expense he may pay.Jasper's marginal ordinary income tax rate is 28 percent.What is Jasper's break-even point in years (for simplicity,ignore time value of money concerns)?

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Definitions:

Break-even Point

The point at which total costs and total revenue are equal, meaning no net loss or gain, and a key financial analysis metric for businesses.

Per Month Salary

The amount of monetary compensation provided to an employee by an employer, calculated and paid on a monthly basis.

Gross Profit

The financial profit a company makes after subtracting the costs of producing and selling its products from the revenue generated from sales.

Authoritative Management Style

A leadership approach characterized by clear directives and control by the manager over decisions and processes.