Reference no: EM132785773
Derek and Meagan Jacoby recently graduated from State University, and Derek accepted a job in business consulting while Meagan accepted a job in computer programming. Meagan inherited $60,000 from her grandfather, who recently passed away. The couple is debating whether they should buy or rent a home. They located a rental home that meets their needs. The monthly rent is $3,050. They also found a three-bedroom home that would cost $280,000 to purchase. The Jacobys could use Meagan's inheritance for a down payment on the home. Thus, they would need to borrow $220,000 to acquire the home. They have the option of paying two discount points to receive a fixed interest rate of 4.50 percent on the loan or paying no points and receiving a fixed interest rate of 5.70 percent for a 30-year fixed loan.
Though anything could happen, the couple expects to live in the home for no more than five years before relocating to a different region of the country. Derek and Meagan don't have any school-related debt, so they will save the $60,000 if they don't purchase a home.
Also, consider the following information:
- The couple's marginal tax rate is 24 percent.
- Regardless of whether they buy or rent, the couple will itemize their deductions and have the ability to deduct all of the property taxes from the purchase of a residence.
- If they buy, the Jacobys would purchase and move into the home on January 1, 2020.
- If they buy the home, the property taxes for the year are $4,400.
- Disregard loan-related fees not mentioned above.
- If the couple does not buy a home, they will put their money into their savings account, where they earn 5 percent annual interest.
- Assume that all unstated costs are equal between the buy and rent options.
Problem 1: What is the approximate break-even point in years for paying the points to receive a reduced interest rate? (To simplify this computation, assume the Jacobys will make interest-only payments, and ignore the time value of money.)