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

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  • Roger E. Cannaday
  • T. L. Tyler Yang

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. Copyright American Real Estate and Urban Economics Association.

Suggested Citation

  • Roger E. Cannaday & T. L. Tyler Yang, 1995. "Optimal Interest Rate-Discount Points Combination: Strategy for Mortgage Contract Terms," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 23(1), pages 65-83.
  • Handle: RePEc:bla:reesec:v:23:y:1995:i:1:p:65-83
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