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SHOW CLEAR WORK ON EXCEL A borrower is faced with choosing between two loans. Loan A...

SHOW CLEAR WORK ON EXCEL

A borrower is faced with choosing between two loans. Loan A is available for $75,000 at 6 percent interest for 30 years, with 6 points to be included in closing costs. Loan B would be made for the same amount, but for 7 percent interest for 30 years, with 2 points to be included in the closing costs. Both loans will be fully amortizing.

a. If the loan is repaid after 20 years, which loan would be the better choice?

b. If the loan is repaid after five years, which loan is the better choice?

Solutions

Expert Solution

To decide between the options, we need to calculate the annual effective interest rate paid by the borrower.

The choice with lower effective interest will be the better option as the effective total cost would be lower to the borrower:

Excel Calculations:

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jeff jeffy answered 2 years ago
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