You Are Purchasing a New Home and Need to Borrow

question 29

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 point, you will need to borrow an additional $3 250 to cover the point 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 paying the point? Show your calculations.

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Definitions:

Compensatory Damages

Financial compensation awarded to plaintiffs in civil lawsuits for losses or injuries suffered due to the defendant's actions.

Cure

A remedy that restores health, fixes a problem, or corrects an error.

Implied Warranties

Legal assurances that are not expressly stated but are understood to apply to transactions, ensuring certain standards of quality and reliability.

"As Is"

The term "As Is" denotes the sale or transfer of an item in its current condition, with no guarantees or warranties provided by the seller regarding quality, condition, or functionality.