Question

You plan to purchase a house for $175,000 using a 15-year mortgage obtained from your local bank. You will make a down payment of 25 percent of the purchase price. You will not pay off the mortgage early. (LG 7-3) a. Your bank offers you the following two options for payment: Option 1: Mortgage rate of 5 percent and zero points. Option 2: Mortgage rate of 4.75 percent and 2 points. Which option should you choose? b. Your bank offers you the following two options for payments: Option 1: Mortgage rate of 4.85 percent and 2 points. Option 2: Mortgage rate of 4.68 percent and 3 points. Which option should you choose?

please show In excel

Answer 1

Solution:

Loan amount = Purchase Price - Downpayment,

= 175,000 - (25%*175,000),

= 131,250,

A). Option 1: PV = 131,250;

N = 15*12 = 180;

rate = 5%/12 = 0.417%,

Solve for PMT. Monthly payment = 1,037.92,

Total amount to be paid = monthly payment*N,

= 1,037.92*180,

= 186,824.99,

Option 2: PV = 131,250;

N = 180;

rate = (4.75% -(0.25%*2))/12,

= 4.25%/12,

= 0.354%,

solve for PMT. Monthly payment = 987.37

Total amount to be paid = (987.37*180) + 2 points

= 177,725.77 + (2%*131,250)

= 180,350.77

Option 2 should be chosen as total amount is lower.

B). Option 1: PV = 131,250;

N = 180;

rate = (4.85%-(0.25%*2))/12,

= 0.3625%,

Solve for PMT. Monthly payment = 994.02

Total amount to be paid = (994.02*180) + (2%*131,250),

= 181,548.81,

Option 2: PV = 131,250;

N = 180;

rate = (4.68%-(0.25%*3))/12,

= 0.3275%,

Solve for PMT. Monthly payment = 966.24

Total amount to be paid = (966.24*180) + (3%*131,250)

= 177,861.20,

Option 2 should be chosen as total amount is lower.

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