On a $320,000 loan a borrower can pay 1.5 discount points to cut the rate, lowering the monthly payment by $84. She expects to keep the loan about 4 years. Using only upfront points and monthly payment savings, does the four-year holding period reach the break-even point?
Correct Answer
C) No: $4,800 / $84 is about 57.14 months, so 48 months does not recover the points
C. The four-year holding period falls short of simple break-even. $320,000 × 1.5% = $4,800 paid upfront. Dividing by $84 gives approximately 57.14 months. At 48 months, savings total $4,032, leaving $768 unrecovered. At 57 payments, savings are $4,788; the 58th full payment exceeds the upfront cost. Scope and exceptions: This is the stipulated simple cash-flow comparison, excluding taxes, investment returns, financed costs and differences in payoff balances. It is not a complete personalized recommendation. The $84 savings is supplied, not a universal benefit per point. Source: Points; comparison over different holding periods — 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. The four-year holding period falls short of simple break-even. $320,000 × 1.5% = $4,800 paid upfront. Dividing by $84 gives approximately 57.14 months. At 48 months, savings total $4,032, leaving $768 unrecovered. At 57 payments, savings are $4,788; the 58th full payment exceeds the upfront cost. Scope and exceptions: This is the stipulated simple cash-flow comparison, excluding taxes, investment returns, financed costs and differences in payoff balances. It is not a complete personalized recommendation. The $84 savings is supplied, not a universal benefit per point.
Why the Other Options Are Wrong
Option A: Buy the points, since discount points are always recovered by year 3
There is no automatic three-year recovery rule.
Option B: Skip the points: discount points never pay back on a loan this size
Loan size alone does not prevent recovery.
Option D: Buy the points: $4,800 recovers in 4 years at $84 a month
Forty-eight payments save less than $4,800.
Exam Tip
Use upfront cost divided by monthly savings, then compare with months the loan will be kept.
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