You plan to purchase a house for 250,000 using a 15-year mortgage obtained from

Question

You plan to purchase a house for 250,000 using a 15-year mortgage obtained from your local bank. You will make a down payment of 20% of the purchase price and monthly payments. You will not pay off the mortgage early. YOur bank offers you the following two options for the payment:

Option 1: Mortgage rate of 3.75% and zero points

Optio 2: Mortgage rate of 3.50% and 2 points.

Which of the following is correct? ROund your calculations to two decimals.

I. In exchange for $4000 up front, Option 2 reduces your monthly mortgage payments by $ 28.14

II. The present value of the monthly savings is less that the points paid up front.

III. Option 1 is the better choice.

a. I only

b. II only

c. I and II only

d. II and III only

e. I, II, and III

Explanation / Answer

20 % of purchase amount as down payment , 250000*20%= 50000 , so the amount to borrow will be 200000.

Option 1: Mortgage rate of 3.75% ( 0.3125 monthly)

Option 2: Mortgage rate of 3.50% ( 0.291667 monthly)

and 2 points (200000*0.02 = 4000)

If option 2 is chosen, will receive = 200000-4000=196000

Monthly Payment (PMT) for each options

1st option : - 200000 = PMT (PVIFA ,0.3125%,360)

                      200000 = PMT (215.92881)

                       PMT = 926.2312

2st option : - 200000 = PMT (PVIFA ,0.291667%,360)

                      200000 = PMT (222.69487)

                       PMT = 898.0898

In exchange for $4000 up front, Option 2 reduces your monthly mortgage payments by $ 28.14 (926.2312-898.0898)

PV of these savings over 30 years

PV = 28.14 (PVIFA,0.291667%,360)

PV =28.14*222.69487 = 6266.6

PV of monthly savings 6266.6 is greater than 4000 upfront.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.