Question
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%
- 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?
- 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?
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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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