Local lenders are offering the following terms for 30-year, fixed-rate mortgages. If your objective is to minimize the cost of borrowing, which alternative do you prefer?
Contract Interest rate % Discount points
8.25 2.75
8.5 2.00
8.75 1.00
a) Assume monthly payments and that the mortgage is held to its maturity. What is the effective cost (APR) of each alternative?
b) Assume monthly payments and a holding period of 5 years. What is the effective cost of each alternative?
c) Assume that each mortgage has a 3 percent prepayment penalty. What is the effective cost of each alternative?