12. A home sold for $142000, The lender what pay in loan points Sirequired the b

Question

12. A home sold for $142000, The lender what pay in loan points Sirequired the buyer to pay 1 3/4 points for an 80% loan pay 1 3/4 a. What if the lender charged 3 points? 13. A mortgage loan is made for $125,000 at 7% interest for 20 years. a. What is the monthly payment? 5969.12 b. What is the effective interest rate (or cost) if the lender charges 2 points for the loan and the loan goes to maturity? 7.26% 14. A couple purchases a home for $250,000. In order to finance this purchase, they wish to secure an 80% LTV ratio loan for fifteen years. They must choose between two alternatives. Loan A is offered at 8.5% with no points. Loan B is offered at 7% with 8 points. a. Calculate the effective interest cost assuming the loan is held until maturity. Which loan is the better choice? b. Calculate the effective interest cost, assuming the loan is paid off after five years. Which loan is the better choice?

Explanation / Answer

1.
=142000*80%*(1.75%)=1988
a)=142000*80%*(3%)=3408

2.
a)
Using financial calcultor:
N=20*12
PV=125000
I/Y=7%/12
FV=0
CPT PMT=$969.12

b)
Using financial calcultor:
N=20*12
PV=125000-125000*2%=$122,500
FV=0
PMT=-$969.12
CPT I/Y=0.60519%
Hence, effective rate=0.60519%*12=7.262%

3.
a)
Loan A:
Effective rate=8.5%
Loan B:
=RATE(15*12,PMT(7%/12,15*12,250000*0.8),250000*0.8*(1-8%))*12=8.3674833%
Loan B is better
b)
Loan A:
Effective rate=8.5%
Loan B:
=RATE(5*12,PMT(7%/12,15*12,250000*0.8),250000*0.8*(1-8%),FV(7%/12,5*12,PMT(7%/12,15*12,250000*0.8),250000*0.8))*12=9.2154%
Loan A is better

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