You plan to purchase a house for $115,000 using a 30 year mortgage pbtained from

Question

You plan to purchase a house for $115,000 using a 30 year mortgage pbtained from your local bank. You will make a down payment of 20 percent of the purchase price. You will not pay off the mortgage early.

A) Your bank offers you the following two options for payment:

Option 1: Mortgage rate of 9% and 0 points

Option 2: Mortgage rate of 8.85% and 2 points.

Which option should you choose

B) Your bank offers you the following two options for payment:

Option 1: Mortgage rate of 10.25% and 1 point

Option 2: Mortgage rate of 10% and 2.5 points.

Which option should you choose?

Explanation / Answer

Loan Amount would be = 80% of 115000

= 92000

Option effective annual rate of interest =(1 =+0.09/12)^12-1

= 9.38%

Second Option

Discount point 2 payment = $2000

Hence Loan paymen = 92000-2000=90000

Interest payment = 8.35%

N= 360 I/Y = 8.35%/12 PV= 92000

Monthly payment = 697.64

I/Y ? PV = 90000 PmT =697.64 N =360

I/Y =0.71%

(1+1.0071)^12-1

=8.92%

Hence option 2 shoudl be choosen

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