marks Window Help a clpccd.instructure.com 4. A Denny\'s Restaurant franchisee i
ID: 3138316 • Letter: M
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marks Window Help a clpccd.instructure.com 4. A Denny's Restaurant franchisee is looking for a 20-year mortgage with 90% financing to build a new location cositng $775,000. The Spring Creek Bank is offering an 8% mortgage with 1.5% discount points. Foremost Savings & Loan is offering a 7.5% mortgage with 4 discount points. The franchisee is unsure which mortgage is the better deal and has asked you for help. a. What is the interest paid on each loan? Round to the nearest cent. $x,xxx.xx Spring Creek Bank , Foremost Savings & Loan b. Taking into account the discount points, what is the total cost of the loan for each? Total cost is interest cost plus points. Round to the nearest cent. $x.xxx.xx Spring Creek Bank Foremost Savings & Loan c. Which lender is offering a better deal and by how much? Type "Spring Creek Bank" or "Foremost Savings and Loan" Savings isExplanation / Answer
The restaurant is seeking a 20 year mortgage loan of 90 % of $ 775000 i.e. $ 697500. The formula used to calculate the fixed monthly payment (P) required to fully amortize a loan of L dollars over a term of n months at a monthly interest rate of r is
P = L[r(1 + r)n]/[(1 + r)n - 1].
The 1.5 % discount point is equal to1.5 % of $ 697500 i.e. $ 10462.50 paid by the restaurant to the lender i.e. Spring Creek Bank at closing.
2. In case of Foremost Savings & Loan, P = 697500*(7.5/1200)[( 1+7.5/1200)20*12]/ [( 1+7.5/1200)20*12 -1] =4359.375(4.460817031/3.460817031 ) = $ 5619.01( on rounding off to the nearest cent).
4 discount point are equal to 4 % of $ 697500 i.e. $ 27900 paid by the restaurant to the lender i.e. Foremost Savings & Loan.
a. The total interest payment to the Spring Creek Bank is 240*$ 5834.17-$ 697500 = $14000200.80 -$ 697500 = $ 700700.80
b. The total interest payment to the Foremost Savings & Loan is 240*$ 5619.01-$ 697500 = $1348562.40 - $ 697500 = $ 651062.40
c. Taking into account the discount points, the total cost of loan in case of the Spring Creek Bank is $700700.80+$10462.50 = $ 711163.3 and that in case of Foremost Savings & Loan is $ 651062.40 + $27900 = $ 678962.40.
. Apparently, Foremost Savings & Loan is offering a better deal. The savings are $ 711163.3 -$ 678962.40 = $ 32200.90.
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