You are looking for a $90,000 mortgage on a house you want to purchase and expec
ID: 2699767 • Letter: Y
Question
You are looking for a $90,000 mortgage on a house you want to purchase and expect to sell after 9 years. You have two options: The %u201CBoring Bank%u201D offers you a simple fixed rate fully amortized 25 year monthly loan for 6%, without any special fees. The %u201CGeurts Bank%u201D offers you a similar mortgage at only 5%, but charges the following extras: Prepayment Penalty of 2.5%, PMI of $30 per month for the first 5 years, and 3.25 Discount Points, which you decide not to finance. Which mortgage will you choose?Explanation / Answer
In the first case, the amount paid in 9 years = $ 90,000 * (1 + 6%)^9 = $152,053.11
In the second case, the amount paid in 9 years = $ 90,000 * (1 + 5%)^9 + 2.5%* $90,000 + future value of the $30 instalments <= $ 90,000 * (1 + 5%)^9 + 2.5%* $90,000 +$30(1+5%)^59/12+$30(1+5%)^58/12+...+$30(1+5%)^0/12 = $143,903.95 which is lesser than $152,053.11
Hence, he should take the second option (bank witth 5% loan ).
I am 100% sure of this.
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