Reference no: EM131647204
Monthly rate is multiplied by 12 to get this second "APR". The larger the difference between the two rates the larger the closing costs and fees for the loan. The mortgage ads usually use some fixed loan amount like $100,000, $150,000, or $200,000. Whether the borrower decides to finance the closing costs or not, this second APR can give the borrower a truer cost of borrowing once the closing costs are factored in. Let's look at a couple of examples of how this works. Imagine the MBAs find a $300,000 home they wish to buy and then have the traditional 20% minimum down payment and will need to borrow $240,000 before any closing costs.
1. Friendly Mortgage offers a 30-year fixed rate mortgage with a nominal annual rate of 3.75% with $1000 in closing costs.
a. What would be the MBA's monthly mortgage payment if they pay the closing costs in cash?
b. What would be the MBA's monthly mortgage payment if they finance the closing costs?
c. What is the second "APR" for this loan as described above?
2. Rapid Loans offers a 30-year fixed rate mortgage with a nominal annual rate of 3.625% with $4000 in closing costs.
a. What would be the MBA's monthly mortgage payment if they pay the closing costs in cash?
b. What would be the MBA's monthly mortgage payment if they finance the closing costs?
c. What is the second "APR" for this loan as described above?
3. Which of the two mortgage options would you recommend to the MBAs? Why
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