Question

a.Christine is getting a 30-year fixed rate $200,000 mortgage. She can get a mortgage rate of 6.5% with no points or a rate of 6.0% with 2 points. She decides it's not worth it to pay the points. Why?

b. One percent of the mortgage value, used as prepaid interest paid at time of purchase, is called a?

c.

If you buy a $200,000 home with 10% down payment, what will be your mortgage? And if you have a 5% mortgage rate and it's a 30-year mortgage, what will be your mortgage payment?

		$200,000; $2,000
		$180,000; $966
		$160,000; $635
		$140,000; $320

Answer 1

a) Mortgage payment without points

PV = -200000

FV=0

I/Y = 6.5/12 ( Since 6.5% is the annual yield, we divide it by 12 to get monthly yield)

N = 30*12 = 360 (There are 30 years*12 = 360 months)

We get PMT = 1264.1360

With points

2 points is equivalent to 2% of 200,000 = $4000

This is the amount that Christine pays upfront. So effectively, the loan amount reduces to 200,000-4000 = 196000

PV = -196000

FV=0

I/Y = 6/12 ( Since 6% is the annual yield, we divide it by 12 to get monthly yield)

N = 30*12 = 360 (There are 30 years*12 = 360 months)

We get PMT = 1175.12

With points, Christine pays a lower monthly mortgage, however, she will have to pay upfront $4000. She decides it's not worth it to pay the points because the upfront payment comes at a cost as seen above. Also, there might be a scenario in which she might not have the upfront amount today.

b. One percent of the mortgage value, used as prepaid interest paid at time of purchase, is called a point

c. 10% downpayment = 10% of 200,000 = 20,000

Mortgage amount = 200000-20000 = $180,000

PV = -180000

FV=0

I/Y = 5/12 ( Since 5% is the annual yield, we divide it by 12 to get monthly yield)

N = 30*12 = 360 (There are 30 years*12 = 360 months)

We get PMT = $966.2

Hence, the mortgage payment = $966