6. Read example 7, p. 246 section 4D in your book if you need help on this secti

Question

6. Read example 7, p. 246 section 4D in your book if you need help on this section. -US. Bank offers a loan of $176,000 for 30 years at 6.5% with closing costs of $3400 plus 2 points. -First Bank offers a rate of 6% but closing costs of $5000 plus 2 points. Using your information from 1b, answer the following: What is the saving in closing costs? (2 points) a. b) You already found the monthly payment for US Bank. (Your answer to 1b) What is the monthly payment for First Bank? (Same loan amount, same number of years) 4 points) c) What is the savings in monthly payments if you go with First Bank? (2 points) d) How many months would it take to recoup the savings US Bank gives up front? (2 points) What conclusion could you make part of the problem.) e) about closing costs versus a lower interest rate? (Be specific to this (2 points)

Explanation / Answer

a. Savings in closing costs: U.S. Bank 3400+(2%*176000)= 6920 First Bank 5000+(2%*176000) 8520 Savings in Closing costs 1600 b. Monthly payment on U.S.Bank loan 176000=Pmt.*(1-1+(0.065/12))^-360)/(0.065/12) Monthly payment = 1112.44 Monthly payment on First Bank loan 176000=Pmt.*(1-1+(0.06/12))^-360)/(0.06/12) Monthly payment = 1055.21 c. Savings in monthly payment ,going with First Bank 1112.44-1055.21= 57.23 ie. 57 d. No.of months to recoup savings in closing costs US Bank gives upfront 1600/57= 28 e. If the mortgage is going to be for more than 28 months , then the one with lower interest rate(First Bank-6%) is preferable,as from every month then on, $ 57 will be saved ,in monthly payments. If the mortgage will be ending before 28 months( Sale/re-finance), then the US Bank offering lesser closing costs should be preferred.

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