You Are Purchasing a New Home and Need to Borrow

question 27

Essay

You are purchasing a new home and need to borrow $325,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.5% APR for a 30-year fixed rate mortgage (with payments made at the end of each month). The mortgage lender also tells you that if you are willing to pay one point, they can offer you a lower rate of 6.25% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $3,250 to cover points you are paying the lender. Assuming that you do not intend to prepay your mortgage (pay off your mortgage early), are you better off paying the one point and borrowing at 6.25% APR or just taking out the loan at 6.5% without any points?

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Definitions:

Possession

The state or fact of owning, having, or controlling something.

Secured Party

A lender, seller, or any other person in whose favor there is a security interest, including a person to whom accounts or chattel paper has been sold.

Collateral

Assets pledged by a borrower to secure a loan or ensure repayment, which can be seized by the lender in the event of default.

Financing Statement

A document prepared by a secured creditor and filed with the appropriate government official to give notice to the public that the creditor claims an interest in collateral belonging to the debtor named in the statement. The financing statement must contain the names and addresses of both the debtor and the creditor, and describe the collateral by type or item.