A borrower is faced with choosing between two loans. Loan A is available for $75,000 at 6 percent interest for 30 years, with 6 points to be included in closing costs. Loan B would be made for the same amount, but for 7 percent interest for 30 years, with 2 points to be included in the closing costs. Both loans will be fully amortizing.
a. If the loan is repaid after 20 years, which loan is the better choice?
b. If the loan is repaid after 5 years, which loan is the better choice?
c. Suppose the lender includes a prepayment penalty of 4 percent in the mortgage loan. If the loan is repaid after 5 years, which loan is the better choice?