What is the effective cost of borrowing of each alternative

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Reference no: EM131971091

Local lenders are offering the following terms for $150,000 (loan amount, 30-year, fixed-rate, fully amortized mortgages.

Contract Interest Rate Discount Points

Mortgage A 8.25% 3.000

Mortgage B 8.75% 1.000

*Discount point: Discount points are a type of prepaid interest or fees mortgage borrowers can purchase that lowers the amount of interest they have to pay on subsequent payments.

Each discount point costs 1% of the loan amount (i.e., you pay a certain amount of money out of $150,000 to a bank at the time of the loan origination). The rates stated in the table above are AFTER rate discounts are applied due to discount points.

a) Assume monthly payments and the mortgage held to its maturity. What is the effective cost of loan (also called as APR) of each alternative?

b) Assume monthly payments, a holding period of five years, and no prepayment penalty. What is the effective cost of borrowing of each alternative?

c) Assume monthly payments and a holding period of five years. Also, assume that each mortgage has a 3 percent prepayment penalty (3% of remaining balance). What is the effective cost of borrowing of each alternative?

Reference no: EM131971091

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