You are borrowing $250,000 to buy a house, using a standard, 30-year mortgage. Your mortgage lender offers a 5.50% mortgage with no points, or a 5.20% mortgage with X points. You plan on living in the house for exactly 48 months, paying only the required payment each month, and without refinancing your mortgage. What points will make you indifferent between the two mortgages? Use the 5.50% rate to discount cash flows between the two options. Note: all rates in the problem are nominal annual rates with monthly compounding. Recall, 1 point is 1% of the mortgage. Carry your answer to 2 decimal places. For example, if your answer is 1.255 points, answer "1.26".

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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You are borrowing $250,000 to buy a house, using a standard, 30-year mortgage. Your mortgage
lender offers a 5.50% mortgage with no points, or a 5.20% mortgage with X points. You plan on
living in the house for exactly 48 months, paying only the required payment each month, and
without refinancing your mortgage. What points will make you indifferent between the two
mortgages? Use the 5.50% rate to discount cash flows between the two options.
Note: all rates in the problem are nominal annual rates with monthly compounding.
Recall, 1 point is 1% of the mortgage. Carry your answer to 2 decimal places. For example, if your
answer is 1.255 points, answer "1.26".
Transcribed Image Text:You are borrowing $250,000 to buy a house, using a standard, 30-year mortgage. Your mortgage lender offers a 5.50% mortgage with no points, or a 5.20% mortgage with X points. You plan on living in the house for exactly 48 months, paying only the required payment each month, and without refinancing your mortgage. What points will make you indifferent between the two mortgages? Use the 5.50% rate to discount cash flows between the two options. Note: all rates in the problem are nominal annual rates with monthly compounding. Recall, 1 point is 1% of the mortgage. Carry your answer to 2 decimal places. For example, if your answer is 1.255 points, answer "1.26".
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