You purchase a new house for $150,000 with a 10% down payment. The bank offers y

Question

You purchase a new house for $150,000 with a 10% down payment. The bank offers you two loan options - both of them for 30 years. Option 1 is an annual interest rate of 6% compounded monthly. Option 2 is an annual interest rate of 5% compounded monthly, but requires you to pay 5 points to obtain tis reduced interest rate. House payments are monthly for both option 1 or 2.

If you choose option 2, you will roll your point fees into the loan. That means, for example, if the amount of the loan were $180,000 and the points fees were $5,000, you would take out a loan for $185,000. So, to compute the monthly payment for option 2, you'll want to compute the monthly payment for the combined value of the loan and point fees.

What is the approximate difference between the 2 monthly payment options, and which is cheapest?

Explanation / Answer

so option 1 is better

option 1 option 2 difference no of period 30 30 rate 1% 0.42% FV 0 0 PV $150,000.00 175000 PMT $5,396.84 $6,217.64 $820.80

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