Question
When you make a large purchase (say, a house or a car) you typically borrow money from lenders (e.g. banks, mortgage brokers, credit unions, etc.)
When you make a large purchase (say, a house or a car) you typically borrow money from lenders (e.g. banks, mortgage brokers, credit unions, etc.) who frequently quote the interest you are going to pay in two ways. First, they quote an annual 'interest rate' - the number they actively advertise, and then a higher (sometimes, much higher) APR- which they don't advertise but HAVE to disclose in the fine print. The latter number (the APR) includes all upfront costs generated by the "loan origination" process and reflects your true annualized costs (hence its name Annual Percentage Rate).
In this discussion, please go on the Internet (e.g. www.bankrate.comLinks to an external site.) and find two lenders with the largest difference between their APRs. Make the following assumptions:
a. You are buying a $250,000 house, taking a $200,000 mortgage (that's the loan) and putting down a 20% down payment ($50,000 cash).
b. You will be paying this $200,000 loan off over the next 30 years (i.e. 360 monthly payments with fixed rates).
1. Estimate the difference (in FUTURE values) of how much you would save, over the life of the loan, if you switch from the higher APR lender to the lower APR lender.
Hint: (Bankrate.com makes it really easy to compare by giving your estimated monthly payments. Calculate the difference between the highest and the lowest monthly payments you find, then using Excel's function FV, calculate the future value of the difference between these monthly payments and that is your answer. )
2. Find a comparable item that you could buy with these savings.
PLEASE EXPLAIN AND SHOW WORK! THANK YOU!!
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