Howard must decide if he will purchase discount points for his mortgage. Two discount points which cost 2% of the mortgage amount will result in a 0.5% decrease in the interest rate. The terms of the mortgage are shown below.

Howard's Mortgage $423,000 30 year fixed 4.5% annual rate 2 discount points M $2,143 28 5% annual rate 0 discount points M = $2.270 76

Howard plans to stay in his house for about five years. Should Howard purchase the two discount points? Explain your reasoning.

In order to determine whether or not Howard should purchase the 2 discount points,we need to ascertain costs to be incurred by Howard under the two scenarios such that the cheaper option can be recommended.

No discount purchase:

total payments for 5 years=$2,270.76*5*12=$136,245.60

The total repayment is $136,245.60

If 2 discount points is purchased:

total monthly repayments=$2,143.28*5*12=$128,596.8

The cost of 2 discount points=$423,000*2%=$8,460

Total cost if 2 discount points is purchased=$8,460 +$128,596.8=$137,056.80

The option to purchase 2 discount points is more expensive by $ 811.20

($137,056.80- $136,245.60)