Optimal Interest Rate‐Discount Points Combination: Strategy for Mortgage Contract Terms

Roger E. Cannaday and T. L. Tyler Yang

Real Estate Economics, 1995, vol. 23, issue 1, 65-83

Abstract: 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.

Date: 1995
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