Should Wally Bee Pay for Lower Interest Rate on his Mortgage?

Should Wally Bee take the offer from the bank to lower his 6% interest rate on his 30-year mortgage to 5.25% by paying 2 3/8 points? The points will cost Wally $14,250. The cost of points is calculated as a percentage of the loan amount.

Calculating the Cost of Points

Wally's Loan Amount: After the $60,000 down payment, Wally's loan amount is $540,000.

Offered Interest Rate: The bank is offering to lower the interest rate from 6% to 5.25% if Wally pays 2 3/8 points.

Calculating Points Cost: To find the cost of the points, we need to calculate 2 3/8 percent of $540,000.

Converting Mixed Number to Improper Fraction: 2 3/8 is equivalent to 19/8.

Calculating Points: Multiply 19/8 by $540,000 => $256,125.

Therefore, the points will cost Wally $14,250. Considering the long-term savings from the lower interest rate, it may be beneficial for Wally to pay the points and secure a lower rate for the remaining duration of his mortgage.

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