Paying 1.5 points on a $300,000 loan costs $4,500 and cuts the payment by $90 a month. The borrower expects to sell in about 3 years. What is the simple break-even period, and is it reached within the expected three-year holding period?
Correct Answer
C) Break-even is 50 months, so the points do not pay back before she sells
C. Simple break-even is 50 months, beyond the expected 36-month holding period. $4,500 ÷ $90 per month = 50 months. At 36 months, stated payment savings total $3,240, leaving $1,260 of the upfront cost unrecovered on this simple basis. Scope and exceptions: This is simple payment-savings break-even, not a complete financial recommendation. It excludes time value, taxes, financing of points, remaining-balance differences and changes to the holding period. The stated $90 savings is a scenario input, not a fixed benefit of 1.5 points. Source: Points and comparing loan options — https://www.consumerfinance.gov/ask-cfpb/how-should-i-use-lender-credits-and-points-also-called-discount-points-en-136/
Why This Is the Correct Answer
C. Simple break-even is 50 months, beyond the expected 36-month holding period. $4,500 ÷ $90 per month = 50 months. At 36 months, stated payment savings total $3,240, leaving $1,260 of the upfront cost unrecovered on this simple basis. Scope and exceptions: This is simple payment-savings break-even, not a complete financial recommendation. It excludes time value, taxes, financing of points, remaining-balance differences and changes to the holding period. The stated $90 savings is a scenario input, not a fixed benefit of 1.5 points.
Why the Other Options Are Wrong
Option A: Break-even cannot be computed without knowing the interest rate charged
The supplied cost and monthly savings are sufficient for this simple calculation.
Option B: Break-even is 30 months, so the points pay back well before she sells
Thirty months would require $150 monthly savings.
Option D: Break-even is 18 months, since 1.5 points equals 18 months of payments
Points measure a percentage of loan amount, not a number of payment months.
Exam Tip
Divide upfront cost by monthly savings, then compare with the expected holding period.
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