A house with price of $500,000

20% down payment and loan amount $400.000

30-year fixed rate mortgage with interest rate as follows:

Choice	Mortgage Rate	Points
a	3.5%	0
b	3.375%	2
c	3.125%	3
d	3.875%	-1

Suppose that there is $8,500 origination cost.

i. What is the effective cost for each choice if you will hold the mortgage for 30 years?Which choice would you like to make?

ii. What is the effective cost for each choice if you will hold the mortgage for only 12months? Which choice would you like to make?

iii. Based on the answers above, which mortgage choices (b, c and d) are not properly priced? Why?