Question

In: Finance

You have worked hard over the last three years to save up enough money for a...

You have worked hard over the last three years to save up enough money for a down payment on your first home. After meeting with your lender, you are faced with two loan options. Both loans are 30 year, fixed rate mortgages with payments of $1,800 per month. Origination fees will be 2% of the loan amount for either loan. Loan A has an APR of 3.0% with no points, while Loan B has an APR of 2.75% with 1.25 points.

- What is your EBC if you select Loan A? Enter your answer as a whole number with 2 decimal points (no percent sign)

- What is your EBC if you select Loan B? Enter your answer as a whole number with 2 decimal points (no percent sign).

- If you intend to stay in the house for 30 years, which loan should you choose?

- You decide you would like to limit your out of pocket closing costs, so you select Loan A, with no discount points. Your best friend is going to move in with you and pay $800 per month in rent. If you add the extra money to your monthly mortgage payment, how many years will it take you to pay off your mortgage?

15.8 years?

17.64 years?

30 years?

211.67 years?

Solutions

Expert Solution

Loan A: Mortgage value, with interest rate of 3% is $426,940.89

After deducting origination fee, net amount received is $418,402.07

Effective Borrowing cost (EBC)= 3.158645%

Loan B: Mortgage value, with interest rate of 2.75% is $ $440,915.83

After deducting origination fee and points, net amount received is $426,586.07

Effective Borrowing cost (EBC)= 3.006501%

As the EBC is lower for Loan B, the same is chosen

With increase in monthly payments by $800 to $2,600, number of payments required is 211.64. The loan will be paid off in 17.64 years

Answer is the second choice given.

Calculations as below:

jeff jeffy answered 1 year ago
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