How much Cost saved - Purchase discount points
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UUID | 424772a1-71e6-11e3-84d9-bc764e202424 |
This equation will compute the total interest saved on a loan if the points are purchased for the price input.
INPUTS.jpg)
- P - the original amount financed, the original principal
- n - term of the loan in years
- i - interest rate entered as a percentage; i.e., enter 4.6 for a 4.6% interest rate
- points - the number of points purchased, which is equivalent to the points discount percentage
- points_cost - the cost paid for the points purchased
NOTES
This equation will do an amortization and calculate the total cost savings during the life of a loan if you buy points up-front.
Discount points are payments made up-front to obtain a lower interest rates. A lender can usually quote mortgage rates and provide payment information regarding zero, one, or two points. Buying a lower interest rate with discount points could be a cost effective way of lowering the total mortgage cost and your monthly payments.
If the amount saved is negative, it indicates the purchase of points resulted in a savings. This shows the points are cost effective at that price.
If the amount saved is a positive value output, this means the cost of the points was larger than any interest savings that would result. This shows the points are NOT cost effective at that price.
EXAMPLES
This equation can be used to answer questions of the form: What happens if I buy points before closing? How much will I save in total cost?
Purchasing discount points allows the homeowner to get a lower interest rate for the duration of the loan term. The 'Points' are subtracted from the interest rate applied to the principal each month.
If you have an interest rate of 6%, and you purchase a "half of a point" (points = 0.5), the new interest rate for the loan will be effectively 5.5%. This could result in an interest expense savings larger than the cost of purchasing the "half of a point".
EXAMPLE1 : If the loan amount, P, is $50,0000 and the interest rate quoted is 6.5% for a 30 year term, n, then if you buy a full point (points = 1.0) at $3,000, the savings from purchasing the points will be: $-8570.22.
In this example the purchasing of a point would make fiscal sense.
EXAMPLE2: If the loan amount, P, is $50,0000 and the interest rate quoted is 6.5% for a 30 year term, n, then if you buy a full point (points = 1.0) at $12,000, the cost from purchasing the points will be: $429.78
In this example the purchasing of a point would not make fiscal sense.
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