Home Mortgage Your client is in need of a 20 year, $100,000, monthly payment, mo

Question

Home Mortgage

Your client is in need of a 20 year, $100,000, monthly payment, mortgage. Bank A is offering no fees, no points, and 4% annual rate. Bank B offers 3.6% annual interest with 2 points. The cost of the points would be added to the legal amount of the mortgage. Your client indicates that she will likely sell the home after 3 years. Which is the better deal, Bank A or Bank B? Back your recommendation with an effective rate calculation of the Bank B rate if:

Your client stays with the mortgage for the full 20 years. Show all inputs for calculations.

Your client pays of the mortgage after 3 years. Show all inputs for calculations.

Explanation / Answer

loan amount       100,000 sells house after 3 years Bank A Interest 4%            4,000 PV annuity factor 3 yrs 4% 2.7751 Total cost bank A          11,100 Bank B Interest 3.6%            3,600 Interest 3.6% 2.7963 total interest      10,066.68 Plus : 2 points            2,000 Total cost bank B    12,066.68 Bank A is better if the house is sold after 3 years sells house after 20 years Interest 4%            4,000 PV annuity factor 20 yrs 4% 13.5903 Bank A cost          54,361 Bank B Interest 3.6%            3,600 Interest 3.6% 14.0847 total interest      50,704.92 Plus : 2 points            2,000    52,704.92 Bank B is better option if the house sold after 20 yrs

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