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You want to take out a $200K mortgage to buy a house. The going interest rate for a 30 year fixed rate mortgage is 6.9%

  1. You want to take out a $200K mortgage to buy a house. The going interest rate for a 30 year fixed rate mortgage is 6.9% APR (annual percent rate). Under these conditions, what will be the size of your monthly mortgage payment?
  2. You evaluate your budget, and estimate that the maximum monthly mortgage payment that you can comfortably afford to make is $1,382. The going rate for a 30 year mortgage is 7.5% APR. What is the maximum size of the loan that you can afford?
  3. You are looking to take out a 300K USD mortgage for 30 years. After shopping around, you have two offers on the table: Bank 1: 2.9% interest rate, up front fees of 3,984 USD Bank 2: 3.59% interest rate, up front fees of 3,031 USD

    Notice the tradeoff between the rate and the fees: you can pay a higher up front fee in exchange for a lower interest rate. How long (at a minimum) must you anticipate staying in this house, in order for the loan from Bank 1 to be better for you? (To make this ballpark estimate, ignore time value of money for simplicity.) Hint: find the difference between the monthly payments for the two mortgages. See how long it takes to 'make up' for the extra up front fee on the lower-rate loan.

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