You decided to buy a house in Amherst valued at $250,000 and need to borrow the entire amount to finance your house. After shopping around for a mortgage loan, you found that the following two deals from the Mortgage One Company are very attractive:
Option 1: A 15-year fixed rate mortgage with no point and an APR of 5%, compounded monthly.
Option 2: A 15-year fixed rate mortgage with two points and an APR of 4.5%, compounded monthly.
The closing costs (not including the points) for the two loans are identical.
According to the law, the interests on your mortgage payments are tax deductible. In fact, at the end of each year, your lender will simply add up your 12-month interest payments (without …show more content…
Based on my calculations and if a person intends to live in the house for 15 years, Option 2 would be a better choice. The total savings for Option 2 would be $25,474.40, while savings for Option 1 would be $22,652.55 Thus, by choosing Option 2 a homebuyer saves $2,821.85.
B. If you plan to live in the house for only five years, how does this affect your choice? Discuss in detail.
Based on my calculations and if a person intends to live in the house for only 5 years, Option 1 would be a better choice for a homebuyer. The total savings for Option 1 would be $13,412.51, while savings for Option 2 would be $11,978.70 . Thus, by choosing Option 1 a homebuyer saves $1,433.80.
C. Suppose that you chose the 5% loan to finance your house. Five years have passed since you purchased the house. You have paid 60 monthly payments with no additional payments toward the principal. The current APR for the 10-year fixed rate mortgage is 4.25% with no point. The Mortgage Two Company offers you a chance to refinance your original loan with the current 4.25% loan. They will charge you $2,500 refinancing fee. This fee is not tax deductible. After considering all the factors, should you take Mortgage Two’s offer to refinance your loan outstanding? Why or why not?
After 60 monthly payments with no additional payments