Your friend is looking to purchase a house. He has picked out the house, but will need to borrow $300,000 in order to complete the purchase. He has asked you for help in navigating the different loan options.
What would be the monthly payment on a 15-year fixed rate loan with an interest rate of 2.625%?
What would be the monthly payment on a 30-year fixed rate loan with an interest rate of 3.125%?
He wants to pay the loan off in 30 years, so he will choose the 30-year fixed rate loan from above. He is trying to decide if he should buy points. What would his monthly payment be if he purchased three points?
If he buys the points (as described in c. above), what is the NPV? Assume that he stays in the house and keeps the loan for the entire 30 years.
What is the NPV if he only stays in the house for 3 years?
What is the breakeven amount of time (in months) that he would need to keep the loan in order for purchasing three points to make financial sense? (Use Solver or Goalseek in Excel, and don’t forget to account for the difference in loan balance at the end of the breakeven amount of time)