The following mortgages are available for Mr. and Mrs. Shelly to finance the pur

Question

The following mortgages are available for Mr. and Mrs. Shelly to finance the purchase of their new home. Which mortgage do you recomment based upon APR?

Purchase Price $250,000

New Mortgage Amount $200,000

Compute the APR for options A,B, and C. Which option do you recommend and why?

a. A 30 year fixed rate mortgage, rate 4.75%; closing costs $3,500.

b. A 15 year fixed rate mortgage, rate 4.25%; closing costs $3,000.

c. A 15 year fixed rate mortgage, rate 4%, closing costs $4,500.

d. Which option is preferred and why?

e. Now assuming that they perfer the 30 year mortgage because of the lower monthly payments, what is the APR abd incremental cost of borrowing 90% loan to value ($225,000) at 5.75% with closing costs of $6,400 when compared to (a) above?

Explanation / Answer

Solution - To Calculate APR we need to calculate the EMI for the Mortgage amount as per the rate and Time - Please note to take interest rate as monthly & Tenure in months to arrive at the EMI by using the below formula

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