Question

Rhonda wants to take out a 30-year, $280,000 loan with a 4.4% APR. She is considering purchasing 2 points, which will decrease her APR by 0.125% per point. Each point will cost 1% of her loan. Compare her monthly payments WITH and WITHOUT the purchase of the points. HELP!!!

Answer 1

Given Information:

Loan amount = $280,000

Annual Percentage Rate = APR = 4.4% = 0.044

Number of years = 30

Required Information:

Monthly payment with points = ?

Monthly payment without points = ?

Answer:

Monthly payment with points = $1,361

Monthly payment without points = $1,402.13

Step-by-step explanation:

The monthly payment can be found using,

$MP = P\times \frac{r\times (1+r)^{n}}{(1+r)^{n} - 1}$

P is the loan amount.

Where interest rate r is given by

$r = \frac{APR}{12}$

Total number of payments n are given by

$n = 30\times12 = 360$

Monthly payment with points:

Rhonda is considering purchasing 2 points and each decreases APR by 0.125%

So the APR becomes

$APR = 4.4\% - 0.125(2)\\\\APR = 4.4\% - 0.25\%\\\\APR = 4.15\%$

and the corresponding interest rate r is

$r = \frac{APR}{12}\\\\r = \frac{4.15\%}{12}\\\\r = 0.3458\% \\\\r = 0.003458$

Finally, the monthly payment is

$MP =280,000\times \frac{0.003458\times (1+0.003458)^{360}}{(1+0.003458)^{360} - 1}\\\\MP =280,000\times 0.0048608 \\\\MP = \ 1,361$

Monthly payment without points:

Interest rate r is,

$r = \frac{APR}{12} \\\\r = \frac{4.4}{12} \\\\r = 0.3667\% \\\\r = 0.003667$

Monthly payment is,

$MP =280,000\times \frac{0.003667\times (1+0.003667)^{360}}{(1+0.003667)^{360} - 1}\\\\MP =280,000\times 0.0050076 \\\\MP = \ 1,402.13$

So monthly payment with points is $1,361 and monthly payment without points is $1,402.13