Question
7. Abdulla wants to buy a house in Glasgow, Scotland. The house sells for 650,000 British pounds and he takes out a loan for 500,000
7. Abdulla wants to buy a house in Glasgow, Scotland. The house sells for 650,000 British pounds and he takes out a loan for 500,000 pounds. He obtains a standard 2.4% fixed interest loan for 25 years where he makes monthly payments for 300 months. The loan amount or principal is $500,000. Unfortunately, the loan has a 3% loan origination fee (3 points). Abdulla will hold this loan for 25 years and keep this house as an investment.
A. Determine the monthly payments and determine the effective interest rate over the 25 year period.
B. Is this 2.4% fixed rate loan with a loan origination fee better than a standard 25-year 3% fixed-rate loan with no origination fee and no prepayment penalty? Show work to justify your answer.
C. As an alternative, lets assume that Abdulla could get a 2.4% 25-year fixed rate loan with no loan origination fees, but he would face a prepayment penalty of 4% of the loan principal remaining at the time of prepayment. If Abdulla held this loan for 3 years (36 months), what would be the prepayment penalty and what would be the effective annual interest rate? Would this loan be better than a 25-year 3% fixed-rate loan with no loan origination fees and no prepayment penalty? Show work used to make this decision.
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