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2. You plan to purchase a house for $195,000 using a 30-year mortgage obtained from your local bank. You will make a down payment of
2. You plan to purchase a house for $195,000 using a 30-year mortgage obtained from your local bank. You will make a down payment of 20 percent of the purchase price. You will not pay off the mortgage early. Your bank offers you the following two options for payment: (point also means discount points indicate that borrower pays up the interest ahead at the closing of the mortgage. This is the up-front fee paid by the borrower in exchange for the reduced interest rate. Ex, the mortgage principal is $1,000 and 2 points. This is to say that the borrower borrows $1,000 but gets $980) Option 1: Mortgage rate of 2.30 percent and zero points. Option 2: Mortgage rate of 2.15 percent and 2 points. Which options should you choose? Will make a down payment of 0.20*$195,000=$39,000 at a closing and borrow $156,000 via the mortgage. If the bank would charge a penalty surcharge of 5 % for the remaining unpaid mortgage once prepaid. What is the break-even mortgage rate after 8 years of paid mortgage for a borrower to consider prepaying the remaining mortgage using the best option you choose from (a) if the new mortgage rate is lower than the break-even mortgage rate
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