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Here is where my question starts:

Assume that you have purchased a home and can qualify for a $300,000 loan. You have narrowed your mortgage search to the following two options:

Mortgage A

Loan term: 30 years

Annual interest rate: 5 percent

Monthly payments

Up-front financing costs: $5,500

Discount points: 3

Mortgage B

Loan term: 15 years

Annual interest rate: 4.5 percent

Monthly payments

Up-front financing costs: $7,500

Discount points: 3

Question: Based on the effective borrowing cost, which loan would you choose?

Now, calculate lender's yield for each (use only discount points as an expense). As a lender which loan would you prefer to underwrite?

3) Assume that you have purchased a home and can qualify for a $200,000.00 loan. You have narrowed your mortgage search to the following two options: Mortgage A Loan term: 30 years Annual interest rate: 6% Monthly payments Up front financing costs: $5,000.00 Discount points: 3 Mortgage B Loan Term: 15 years Annual interest rate: 5.5% Monthly payments Up front financing costs: $7,000.00 Discount points: 3 Based on the effective borrowing cost, which loan would you choose? Now, calculate lender's yield for each (use only discount points as an expense). As a lender which loan would you prefer to underwrite? Solution: Mortgage A payment = $1,199.10 N = 360 I/YR = 6/12 PV = 200,000 PMT = ? FV =0 Mortgage A effective borrowing cost = 6.54% N=360 I YR = ? PV = 189,000 PMT = -1,199.10 FV = 0 PV = ($200,000 x 0.97) - $5,000 = 5194,000 - $5,000 = $189,000 EBC = 0.545% monthly x 12 = 6.536% Mortgage B payment = 1,634.17 N = 180 I/YR = 5.5/12 PV = 200,000 PMT = ? FV = 0 Mortgage B effective borrowing cost = 5.97% N = 180 I/YR = ? PV = 187,000 PMT = -1,634.17 FV = 0 PV = ($200,000 x 0.97) - $7,000 = 5194,000 - $7,000 = $187,000 EBC = 0.5459 monthly x 12 = 6.55%; so mortgage A has a slightly lower EBC 3) Assume that you have purchased a home and can qualify for a $200,000.00 loan. You have narrowed your mortgage search to the following two options: Mortgage A Loan term: 30 years Annual interest rate: 6% Monthly payments Up front financing costs: $5,000.00 Discount points: 3 Mortgage B Loan Term: 15 years Annual interest rate: 5.5% Monthly payments Up front financing costs: $7,000.00 Discount points: 3 Based on the effective borrowing cost, which loan would you choose? Now, calculate lender's yield for each (use only discount points as an expense). As a lender which loan would you prefer to underwrite? Solution: Mortgage A payment = $1,199.10 N = 360 I/YR = 6/12 PV = 200,000 PMT = ? FV =0 Mortgage A effective borrowing cost = 6.54% N=360 I YR = ? PV = 189,000 PMT = -1,199.10 FV = 0 PV = ($200,000 x 0.97) - $5,000 = 5194,000 - $5,000 = $189,000 EBC = 0.545% monthly x 12 = 6.536% Mortgage B payment = 1,634.17 N = 180 I/YR = 5.5/12 PV = 200,000 PMT = ? FV = 0 Mortgage B effective borrowing cost = 5.97% N = 180 I/YR = ? PV = 187,000 PMT = -1,634.17 FV = 0 PV = ($200,000 x 0.97) - $7,000 = 5194,000 - $7,000 = $187,000 EBC = 0.5459 monthly x 12 = 6.55%; so mortgage A has a slightly lower EBC