M1.Q1:

You are finally ready to stop paying rent. You found the house of your dreams but financing it can be tricky. You apply for a $300,000, 15-year mortgage loan (monthly payments). The bank offers the following options:

• 4.5% APR with no points equal payments loan.
• 4% APR with 2 points equal payments loan.

1. Calculate the Effective Annual Interest Rate (EAR) for each one of the options above. Which option should you choose?
2. You complain to the bank that the monthly payment for the two options above is a little too high for you right now (although you are certain you will be able to make much larger payments in the future, once you become CEO at your firm). In response, the bank offers you a 4%, 15-year balloon loan with a monthly payment of only $1,300. Can you build the amortization schedule for this loan? Would you prefer this option to the one you picked in point 1 above? Why?

Equal Payments with points OPTION 1 Type of Loan Mortgage Principal Quoted Interest (APR) Motgage term (years) Number of Payments per year Points Equal payments 300000 4.50% OPTION 2 Type of Loan Mortgage Principal Quoted Interest (APR) Motgage term (years) Number of Payments per year Points OPTION 3 Type of Loan Balloon Loan Mortgage Principal Quoted Interest Motgage term (years) Number of Payments per y Points 300000 4% 15 12 300000 5% 15 15 12 0 0 1300 Monthly Payment Monthly Interest Rate EAIR Monthly Payment Monthly Interest Rate EAIR Monthly Payment Monthly rate EAIR Q1-1: Which option should you choose between 1 and 2? Why? Q1-2: BUILD THE AMORTIZATION TABLE FOR THE BALLON LOAN BELOW USING THE GIVEN FORMAT Loan balance at beginning of year Total payment Interest payment Principal repayment Loan principal balance at end of year Payment # Q1-2: Would you prefer option 3 to the one you picked in Q1-1 above? Why? Equal Payments with points OPTION 1 Type of Loan Mortgage Principal Quoted Interest (APR) Motgage term (years) Number of Payments per year Points Equal payments 300000 4.50% OPTION 2 Type of Loan Mortgage Principal Quoted Interest (APR) Motgage term (years) Number of Payments per year Points OPTION 3 Type of Loan Balloon Loan Mortgage Principal Quoted Interest Motgage term (years) Number of Payments per y Points 300000 4% 15 12 300000 5% 15 15 12 0 0 1300 Monthly Payment Monthly Interest Rate EAIR Monthly Payment Monthly Interest Rate EAIR Monthly Payment Monthly rate EAIR Q1-1: Which option should you choose between 1 and 2? Why? Q1-2: BUILD THE AMORTIZATION TABLE FOR THE BALLON LOAN BELOW USING THE GIVEN FORMAT Loan balance at beginning of year Total payment Interest payment Principal repayment Loan principal balance at end of year Payment # Q1-2: Would you prefer option 3 to the one you picked in Q1-1 above? Why