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The buyer of a piece of real estate is often given the option ofbuying down the loan. This option gives the buyer a choice of loanterms in which various combinations of interest rates and discountpoints are offered. The choice of how many points and what rate isoptimal is often a matter of how long the buyer intends to keep theproperty.

Darrell Frye is planning to buy an office building at a cost of$988,000. He must pay 10% down and has a choice of financing terms.He can select from a 7% 30-year loan and pay 4 discount points, a7.25% 30-year loan and pay 3 discount points, or a 7.5% 30-yearloan and pay 2 discount points. Darrell expects to hold thebuilding for four years and then sell it. Except for the three rateand discount point combinations, all other costs of purchasing andselling are fixed and identical.

1. What is the amount being financed?

2. If Darrell chooses the 4-point 7% loan, what will be his totaloutlay in points and payments after 48 months?

3. If Darrell chooses the 3-point 7.25% loan, what will be histotal outlay in points and payments after 48 months?

4. If Darrell chooses the 2-point 7.5% loan, what will be his totaloutlay in points and payments after 48 months?

5. Of the three choices for a loan, which results in the lowesttotal outlay for Darrell?