Mortgage Alternatives

Business & Finance
Price: $5 USD

Question description


Hide Description

This issue has three parts.  

  Application of time value of money principles can help you make decisions on loan alternatives. This exercise requires you to compare three mortgage alternatives using various combinations and points. Points on a mortgage refer to a payment that is made up front to secure the loan. A single point is a payment of one percent of the amount of the total mortgage loan. If you were borrowing $200,000 a single point would require an upfront payment of $2,000.  

  When you are evaluating alternative mortgages, you may be able to obtain a lower rate by making an upfront payment. This comparison will not include an after-tax comparison. When taxes are considered, the effective costs are affected by interest paid and the amortization of points on the loan. This analysis will require you to compare only before-tax costs. provides a mortgage calculator that allows you to compare the effective costs on alternative mortgages. You are considering three alternatives for a $250,000 mortgage. Assume that the mortgage will start in December, 2002. The mortgage company is offering you a 6% rate on a 30-year mortgage with no points. If you pay 1.25 points, they are willing to offer you the mortgage at 5.875%. If you pay 2 points, they are willing to offer you the mortgage at 5.75%.  

 1. What are the mortgage payments under the three alternatives?  

 2. Which alternative has the lowest effective cost? 

 3. Can you explain how the effective rate is being calculated?  

Tutor Answer

(Top Tutor) Daniel C.
School: New York University
Studypool has helped 1,244,100 students
Ask your homework questions. Receive quality answers!

Type your question here (or upload an image)

1825 tutors are online

Brown University

1271 Tutors

California Institute of Technology

2131 Tutors

Carnegie Mellon University

982 Tutors

Columbia University

1256 Tutors

Dartmouth University

2113 Tutors

Emory University

2279 Tutors

Harvard University

599 Tutors

Massachusetts Institute of Technology

2319 Tutors

New York University

1645 Tutors

Notre Dam University

1911 Tutors

Oklahoma University

2122 Tutors

Pennsylvania State University

932 Tutors

Princeton University

1211 Tutors

Stanford University

983 Tutors

University of California

1282 Tutors

Oxford University

123 Tutors

Yale University

2325 Tutors