When obtaining a mortgage, one choice you make is whether to pay points in exchange for a lower interest rate. This homework asks you to work through the math to decide whether to do so. Scenario Details:

• Amount of mortgage: $500,000
• Other closing costs: $6,500
• Length of mortgage: 30 years
• Mortgage interest compounds monthly, and payments are monthly
• Expected duration of residence: 4 years

Mortgage Options:

• Mortgage A
  • Interest rate: 7.5%
  • Points: 0
• Mortgage B
  • Interest rate: 7.0%
  • Points: 2

Further instructions:

• Round all answers to two decimal places.
• Pay attention to negative signs.
• Do not include dollar signs ($).

You should choose the mortgage with the

		Lowest closing costs
		Highest present value
		Lowest total cash flows
		Lowest monthly payment

10 points

QUESTION 2

What is the payment for Mortgage A (rounded to two decimal places)?

10 points

QUESTION 3

What is the payment for Mortgage B (rounded to two decimal places)?

10 points

QUESTION 4

When you payoff your mortgage in four years, how much will that lump sum payment be for Mortgage A? Be sure to use the rounded mortgage payment in this calculation.

10 points

QUESTION 5

When you pay off your mortgage in four years, how much will that lump sum payment be for Mortgage B? Be sure to use the rounded mortgage payment in this calculation.

10 points

QUESTION 6

Using a discount rate of 4.6%, what is the present value of the cash flows associated with Mortgage A, if paid off after four years?

10 points

QUESTION 7

Using a discount rate of 4.6%, what is the present value of the cash flows associated with Mortgage B, if paid off after four years?

10 points

QUESTION 8

Which mortgage is the better choice if you pay the mortgage off after four years?

		Mortgage A
		Mortgage B
		They are the same
		There is no way to tell

10 points

QUESTION 9

The remaining questions explore how the answers change if you repay the mortgage after just one year.

Using a discount rate of 4.6\%, what is the present value of the cash flows associated with Mortgage A, if paid off after one year?

10 points

QUESTION 10

Using a discount rate of 4.6\%, what is the present value of the cash flows associated with Mortgage B, if paid off after one year?

10 points

QUESTION 11

Which mortgage is the better choice if you pay the mortgage off after one year?

		Mortgage A
		Mortgage B
		They are the same
		There is no way to tell