Rae and Archie are financing $136,000 to purchase a condominium. They obtained a 15-year fixed-rate loan with a rate of 5.25%. They have been given the option of purchasing up to four points to lower their rate to 5.02%. How much will the four points cost them?
By "four points", they generally mean 4% of the principal of $136,000 in this case.
So, 4% on $136,000 =$5,440 !!.
The monthly payment on the loan without points @ 5.25% for 15 years =$1,093.27.
The monthly payment on the loan with points @ 5.02% =$1,076.90
The monthly savings =$1,093.27 - $1,076.90 =$16.37.
Total savings over the lifetime of the loan, or 180 payments x $16.37 =$2,946.60.
Therefore the cost to them would be =$5,440 - $2,946.60 =$2,493.40. over 15-year period.
As you can see it is a "bad deal" for them. If they were to buy 2 points at the same 5.02%, then they would save about $227 over the lifetime of the loan.