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Choose the best option between the following 2 mortgages. A $1,000,000 fully amortizing, fixed rate mortgage...

Choose the best option between the following 2 mortgages. A $1,000,000 fully amortizing, fixed rate mortgage with a 10 year term, monthly payments, an interest rate of 6%, and $12,000 closing costs. Or, a $1,000,000 interest only, fixed rate mortgage with a 10 year term, monthly payments, and interest rate of 6.5%, and $2,000 in closing costs. Please show work.

Solutions

Expert Solution

In the case of the fully amortizing loan, monthly payment is arrived at $11,102.05 using PMT function of Excel. Annual Percentage Rate (APR) of this loan is 6.267569%

In the case of interest only loan, monthly interest payment is $5,416.67 and the final payment is one month interest plus the loan amount. Annual percentage rate is 6.527285%

Since the fully amortizing loan has lower interest cost, the same is the best option.

Calculation as follows:

jeff jeffy answered 2 years ago
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