Optimal Interest Rate-Discount Points Combination: Strategy for Mortgage Contract Terms
Posted: 25 May 1998
This paper is distinguished from previous papers by its focus on income-producing properties, rather than owner-occupied single-family residential properties. The real estate investor's strategy, in terms of choosing an interest rate-discount points combination, is analyzed by using a discounted cash flow approach. Under this framework, the investor with a lower marginal tax rate, lower required rate of return and longer investment horizon tends to negotiate for a mortgage contract with a higher number of discount points and lower interest rate. In addition, an intermediate rate-points combination is preferred by an investor only when the lender's required interest rate is a decreasing convex function of the number of discount points.
JEL Classification: M00
Suggested Citation: Suggested Citation