Buydown [2921]

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Janice wants a 9%, $100,000 loan for 15 years.  The bank’s rate is 10%.  The bank will give Janice a 9% loan if she pays the fair market value of the buydown for the first 5 years of the loan.  What is the fair market value of the buydown?  Use monthly tables.

 

Column

Rate

Years

Amount

Factor

Value

6

10.0%

15

$100,000

0.010746

$1,074.61

6

9.0%

15

$100,000

0.010143

$1,014.27

 

Difference between the monthly payment of the two options

$60.34

 

Column

Rate

Years

Amount

Factor

Value

5

10.0%

5

$60.34

47.065369

$2,839.92

 

$60.34 is the amount that the bank will lose each month if they give Janice her desired rate.  To offset the loss, the bank charges Janice the present value of the monthly loss for the first 5 years of the loan ($2,839.92).

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