Consider the following pair of mortgage loan options for a ?$135,000 mortgage. Which mortgage loan has...

Consider the following pair of mortgage loan options for a ?$135,000 mortgage. Which mortgage loan has the larger total cost? (closing costs? + the amount paid for points? + total cost of? interest)? By how? much? Mortgage? A: 20?-year fixed at 12.25?% with closing costs of ?$2400 and 1 point. Mortgage?, B: 20?-year fixed at 11.25?% with closing costs of ?$2400 and 2 points. Choose the correct answer? below,

A. Mortgage B has a larger total cost than mortgage A by ?$ __________

B. Mortgage A has a larger total cost than mortgage B by ?$ ___________

Expert Solution

A	Mortgage Loan	135000
	Points	1%*135000	1350
	Closing Costs	2400

	Using the PMT function in excel we get yearly payment of
	PMT(12.25%,20,135000)
	($18,357.57)

	Years	Beginning Loan	Interest	Principal	Total Payment	Closing Balance
	1	135000	16537.50	1,820.07	18357.57	133179.9
	2	133179.93	16314.54	2,043.03	18357.57	131136.9
	3	131136.9014	16064.27	2,293.30	18357.57	128843.6
	4	128843.6018	15783.34	2,574.23	18357.57	126269.4
	5	126269.3731	15468.00	2,889.57	18357.57	123379.8
	6	123379.8013	15114.03	3,243.54	18357.57	120136.3
	7	120136.2569	14716.69	3,640.88	18357.57	116495.4
	8	116495.3784	14270.68	4,086.89	18357.57	112408.5
	9	112408.4923	13770.04	4,587.53	18357.57	107821
	10	107820.9626	13208.07	5,149.50	18357.57	102671.5
	11	102671.4605	12577.25	5,780.32	18357.57	96891.14
	12	96891.14439	11869.17	6,488.40	18357.57	90402.74
	13	90402.73958	11074.34	7,283.23	18357.57	83119.51
	14	83119.50518	10182.14	8,175.43	18357.57	74944.07
	15	74944.07456	9180.65	9,176.92	18357.57	65767.15
	16	65767.15369	8056.48	10,301.09	18357.57	55466.06
	17	55466.06002	6794.59	11,562.98	18357.57	43903.08
	18	43903.08237	5378.13	12,979.44	18357.57	30923.64
	19	30923.63996	3788.15	14,569.42	18357.57	16354.22
	20	16354.21586	2003.39	16,354.18	18357.57	0.037302

			232151.44	134999.96

	Cost of Loan = 232151.44+1350+2400		235901.44

B	Interest Rate	11.25%
	Closing costs	2400
	Points	2%*135000	2700

	Using the PMT function in excel we get yearly payment of
	PMT(11.25%,20,135000)
	($17,230.66)

	Years	Beginning Loan	Interest	Principal	Total Payment	Closing Balance
	1	135000	15187.50	2,043.16	17230.66	132956.8
	2	132956.84	14957.64	2,273.02	17230.66	130683.8
	3	130683.8245	14701.93	2,528.73	17230.66	128155.1
	4	128155.0948	14417.45	2,813.21	17230.66	125341.9
	5	125341.8829	14100.96	3,129.70	17230.66	122212.2
	6	122212.1847	13748.87	3,481.79	17230.66	118730.4
	7	118730.3955	13357.17	3,873.49	17230.66	114856.9
	8	114856.905	12921.40	4,309.26	17230.66	110547.6
	9	110547.6468	12436.61	4,794.05	17230.66	105753.6
	10	105753.5971	11897.28	5,333.38	17230.66	100420.2
	11	100420.2168	11297.27	5,933.39	17230.66	94486.83
	12	94486.83117	10629.77	6,600.89	17230.66	87885.94
	13	87885.93968	9887.17	7,343.49	17230.66	80542.45
	14	80542.44789	9061.03	8,169.63	17230.66	72372.81
	15	72372.81328	8141.94	9,088.72	17230.66	63284.09
	16	63284.09478	7119.46	10,111.20	17230.66	53172.9
	17	53172.89544	5981.95	11,248.71	17230.66	41924.19
	18	41924.18618	4716.47	12,514.19	17230.66	29410
	19	29409.99712	3308.62	13,922.04	17230.66	15487.96
	20	15487.9618	1742.40	15,488.26	17230.66	-0.3025

			209612.90	135000.30

	Total Costs = 209612.90+2400+2700		214712.9

		A	B
A)		235901.44	214712.9	21188.54

	Mortgage A has a larger total cost than mortgage B by $ 21188.54

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