The Todd chooses to make lower monthly payments, it will take him 25 months to pay off the cost of the discount points.
What is discount?
By paying a charge or fee, a debtor can purchase the right to postpone payments to a creditor for a predetermined period of time through the financial mechanism known as discounting. In essence, the party who is currently owing money purchases the right to postpone payment until a later time. Based on mortality, impatience, and salience effects, this transaction assumes that most people prefer current interest to postponed interest. The difference between the amount initially owed in the present as well as the amount that must be paid inside the future to settle the debt is known as the discount, or charge.
The discount frequently has a discount rate, also known as the discount yield.
[tex]\begin{aligned}\text{ Number of months }=&\frac{\text{ percentage discount points }\times \text{ Principal }}{\text{ Higher amount without points }-\text{ Lower amount with points }}\\&=\frac{0.02\times 100,000}{600-520}\\&=\frac{2000}{80}\\&=25\end{aligned}[/tex]
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