Suppose you found a house that you want to buy, but still have to determine what mortgage to use. Commonwealth Bank of Australia (CBA) has offered a 30-year fixed mortgage that requires you to pay 8 per cent interest compounded monthly. If you take this offer, you will have to pay 3 points, which means you will have to make a payment equal to 3 per cent of the amount borrowed at the time you sign the mortgage agreement. Westpac Bank has offered a 30-year fixed mortgage with no points, but at an interest rate equal to 8.4 per cent compounded monthly. For either mortgage, the first payment would not be made until one month after the mortgage agreement is signed. The purchase price of the house is $250,000, and you plan to make a down payment equal $40,000.

1.1 If you make a down payment equal to $40,000 and borrow the rest of the purchase price of the house from Commonwealth Bank of Australia, how much will you have to pay for the 3 points when you sign the mortgage agreement?

1.2 Assume the points charged by commonwealth bank of Australia can simply be added to the mortgaged amount. That means that the total amount borrowed from the bank includes the points to be paid at the time the mortgage is signed, plus the net purchase price of the house( purchase price less the down payment). For example, the points that apply to a $100,000 mortgage would be $2000, so the mortgage amount would be $102,000. Which bank offers the lower monthly payments? 15 marks

1.3 How many points would the commonwealth bank of Australia mortgage have to have for you to be indifferent between the two mortgages? 10 marks