A new home that costs $490,000 has presented itself. You want to make a 20% down payment and finance the rest. The bank has offered an opportunity to buy down the quoted interest rate of 4.75% by 0.125% per point purchased. Each point will cost 1% of the amount borrowed. You were hoping the interest rate was no more than 4.375%. What will it cost to buy down the quoted interest rate to 4.375%?
A new home that costs $490,000 has presented itself. You want to make a 20% down payment and finance the rest. The bank has offered an opportunity to buy down the quoted interest rate of 4.75% by 0.125% per point purchased. Each point will cost 1% of the amount borrowed. You were hoping the interest rate was no more than 4.375%. What will it cost to buy down the quoted interest rate to 4.375%?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:A new home that costs $490,000 has presented itself. You want to make a 20% down payment and finance the rest. The bank
has offered an opportunity to buy down the quoted interest rate of 4.75% by 0.125% per point purchased. Each point will cost
1% of the amount borrowed. You were hoping the interest rate was no more than 4.375%. What will it cost to buy down the
quoted interest rate to 4.375%?
Expert Solution
Step 1
In the mention question, we are expecting an interest rate which is 4.375% but we are given quoted interest rate which is from 4.75% to 0.125%.
So, to bring down the interest rate from quoted to our desired one then we have to buy points to reduce the buying down the interest rate.
Each point will cost = 1% of amount borrowed
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