Consider the following pair of mortgage loan options for a 1

Consider the following pair of mortgage loan options for a ?$135,000 mortgage. Which mortgage loan has the larger total cost? (closing costs? + the amount paid for points? + total cost of? interest)? By how? much? Mortgage? A: 20?-year fixed at 12.25?% with closing costs of ?$2400 and 1 point. Mortgage?, B: 20?-year fixed at 11.25?% with closing costs of ?$2400 and 2 points. Choose the correct answer? below,

A. Mortgage B has a larger total cost than mortgage A by ?$ __________

B. Mortgage A has a larger total cost than mortgage B by ?$ ___________

Solution

A Mortgage Loan 135000 Points 1%*135000 1350 Closing Costs 2400 Using the PMT function in excel we get yearly payment of PMT(12.25%,20,135000) ($18,357.57) Years Beginning Loan Interest Principal Total Payment Closing Balance 1 135000 16537.50           1,820.07 18357.57 133179.9 2 133179.93 16314.54           2,043.03 18357.57 131136.9 3 131136.9014 16064.27           2,293.30 18357.57 128843.6 4 128843.6018 15783.34           2,574.23 18357.57 126269.4 5 126269.3731 15468.00           2,889.57 18357.57 123379.8 6 123379.8013 15114.03           3,243.54 18357.57 120136.3 7 120136.2569 14716.69           3,640.88 18357.57 116495.4 8 116495.3784 14270.68           4,086.89 18357.57 112408.5 9 112408.4923 13770.04           4,587.53 18357.57 107821 10 107820.9626 13208.07           5,149.50 18357.57 102671.5 11 102671.4605 12577.25           5,780.32 18357.57 96891.14 12 96891.14439 11869.17           6,488.40 18357.57 90402.74 13 90402.73958 11074.34           7,283.23 18357.57 83119.51 14 83119.50518 10182.14           8,175.43 18357.57 74944.07 15 74944.07456 9180.65           9,176.92 18357.57 65767.15 16 65767.15369 8056.48        10,301.09 18357.57 55466.06 17 55466.06002 6794.59        11,562.98 18357.57 43903.08 18 43903.08237 5378.13        12,979.44 18357.57 30923.64 19 30923.63996 3788.15        14,569.42 18357.57 16354.22 20 16354.21586 2003.39        16,354.18 18357.57 0.037302 232151.44 134999.96 Cost of Loan = 232151.44+1350+2400 235901.44 B Interest Rate 11.25% Closing costs 2400 Points 2%*135000 2700 Using the PMT function in excel we get yearly payment of PMT(11.25%,20,135000) ($17,230.66) Years Beginning Loan Interest Principal Total Payment Closing Balance 1 135000 15187.50           2,043.16 17230.66 132956.8 2 132956.84 14957.64           2,273.02 17230.66 130683.8 3 130683.8245 14701.93           2,528.73 17230.66 128155.1 4 128155.0948 14417.45           2,813.21 17230.66 125341.9 5 125341.8829 14100.96           3,129.70 17230.66 122212.2 6 122212.1847 13748.87           3,481.79 17230.66 118730.4 7 118730.3955 13357.17           3,873.49 17230.66 114856.9 8 114856.905 12921.40           4,309.26 17230.66 110547.6 9 110547.6468 12436.61           4,794.05 17230.66 105753.6 10 105753.5971 11897.28           5,333.38 17230.66 100420.2 11 100420.2168 11297.27           5,933.39 17230.66 94486.83 12 94486.83117 10629.77           6,600.89 17230.66 87885.94 13 87885.93968 9887.17           7,343.49 17230.66 80542.45 14 80542.44789 9061.03           8,169.63 17230.66 72372.81 15 72372.81328 8141.94           9,088.72 17230.66 63284.09 16 63284.09478 7119.46        10,111.20 17230.66 53172.9 17 53172.89544 5981.95        11,248.71 17230.66 41924.19 18 41924.18618 4716.47        12,514.19 17230.66 29410 19 29409.99712 3308.62        13,922.04 17230.66 15487.96 20 15487.9618 1742.40        15,488.26 17230.66 -0.3025 209612.90 135000.30 Total Costs = 209612.90+2400+2700 214712.9 A B A) 235901.44 214712.9 21188.54 Mortgage A has a larger total cost than mortgage B by $ 21188.54