Suppose you borrow $300,000 at 4% for 30 years, monthly payments. The APR on the loan is 4.25%. What amount of points were charged if there was a $5,000 origination cost?
Problem 2
Loan 1: $200,000 at 4.5% for 30 years, monthly payments, and no origination cost. APR = 4.80%
Loan 2: $200,000 at 4.25% for 30 years, monthly payments, and no origination cost.
What is the discount point charged on Loan 1 assuming there is no cost associated with the origination?
How many points must be charged on the 2nd loan to equalize the APR on the two loans?
Problem 3
Five years ago, you purchase a house of $500,000. You borrow a mortgage with 80% of LTV (loan to value ratio). The interest rate on the mortgage is 5%. Payment terms are being made monthly to amortize the loan over 30 years. You have found another lender who will refinance the current outstanding loan balance at 4.0% with monthly payments for 30 years. The new lender will charge two discount points on the new loan. Other refinancing costs will equal $2,000.  
What is your monthly payment for the current loan?
What is the new loan amount if you choose to refinance?
What is your monthly payment for the new loan?
What is the effective cost of your new loan if you hold the loan for 30 years?
If you want to refinance today, at least how many years should you stay in the house (do not prepay)? Why?
Problem 4
Two years ago, you purchase a house of $100,000. You borrow a mortgage with 80% of LTV (loan to value ratio). The interest rate on the mortgage is 6%. Payment terms are being made monthly to amortize the loan over 30 years. You have found another lender who will refinance the current outstanding loan balance plus all the costs associated with the new loan at 4.5% with monthly payments for 30 years. Suppose that the new lender will charge three discount points on the new loan and other refinancing costs will equal $3,000.  
What is the new loan amount if you choose to refinance? [7 points]
What is your monthly payment for the new loan? [7 points]
What is the effective cost of your new loan and do you refinance if you hold the loan for 30 years?

Problem 5:

 

• What is the incremental borrowing cost of $30,000 for loan 1 over loan 2 if you hold the loan for the entire term and there are no origination costs for the two loans?
• What is the incremental borrowing cost of $30,000 for loan 1 over loan 2 if you hold the loan for only 6 years (72 months) and there are no origination costs for the two loans?
• If the origination costs for loans 1 and 2 are $8,000 and $7,000, respectively and you hold the loan for only 6 years (72 months), what is the incremental borrowing cost for loan 1 over loan 2?

Choice 1 2 Loan Amount $250,000 $220,000 Term (Years) 30 30 Interest Rate 5% 4.50%