Jasper Is Looking to Purchase a New Home for $250,000

Essay

Jasper is looking to purchase a new home for $250,000. He is paying $50,000 as a down payment on the home and financing the remaining $200,000 with a loan secured by the home. He has the option of (1)paying no discount points on the loan and paying interest at 6.5 percent or (2)paying one discount point on the loan and paying interest of 5.5 percent on the loan. Both options require Jasper to make interest-only payments for the first five years of the loan and to pay the loan principal over the 25 years after that (it is a 30-year loan). Jasper itemizes deductions irrespective of any interest expense he may pay. Jasper's marginal ordinary income tax rate is 32 percent. What is Jasper's break-even point in years? (For simplicity, ignore time value of money concerns.)