1.Married clients have just been approved for a 20-year, $ 150,000 mortgage. They have been given a choice of two loans. One loan has an annual percentage rate (APR) of 8% and does not carry a fee, and the other has an APR of 7.5% but carries a discount fee of 2% of the initial loan amount. The fee for the second mortgage is payable in cash at loan inception and cannot be financed with the loan.

From a present value cost perspective, which loan is the better deal, assuming they sell their home immediately after paying the 120th payment and require a 9% effective annual rate of return? In other words, which option has the lower cost?

Assume all required payments are made at the end of each month and that interest is compounded monthly. Remember to consider the difference in loan payment, the difference in remaining balance at the time of sale, and the present value of the discount points on an after-tax basis assuming the points are fully deductible. The clients are in the 25% marginal tax bracket. (Hint: You can solve this problem at either T0 or T120.) Assume the subject property is the same as the projected value.