Note: 1 discount point = 1% of loan amount a)Calculate the effective borrowing cost to the borrower. b) Compute Lender's Yield. c) Based on the effective borrowing cost, which loan would you choose? Explain your answer using your calculations from a) and b). Time, Opportunity Costs and Value DecisionsAssume that you have purchased a home and can qualify for a $300,000 loan. You havenarrowed your mortgage search to the following two options:Mortgage BLoan term: 15-yearsAnnual interest rate: 4.5 percentMonthly paymentsUp-front financing costs: $7,500Discount points: 3Mortgage ALoan term: 30 yearsAnnual interest rate: 5 percentMonthly paymentsUp-front financing costs: $5,500Discount points: 3

Here, 1 Discount Point = 1% and hence, 3 Discount points = 3% of the loan amount

Answered: Assume that you have purchased a home…

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter5: Making Automobile And Housing Decisions

Section: Chapter Questions

Problem 8FPE

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Note: 1 discount point = 1% of loan amount
a)Calculate the effective borrowing cost to the borrower.
b) Compute Lender's Yield.
c) Based on the effective borrowing cost, which loan would you choose? Explain your answer using your calculations from a) and b).

Time, Opportunity Costs and Value Decisions
Assume that you have purchased a home and can qualify for a $300,000 loan. You have
narrowed your mortgage search to the following two options:
Mortgage B
Loan term: 15-years
Annual interest rate: 4.5 percent
Monthly payments
Up-front financing costs: $7,500
Discount points: 3
Mortgage A
Loan term: 30 years
Annual interest rate: 5 percent
Monthly payments
Up-front financing costs: $5,500
Discount points: 3

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