1. Suppose you have two options on a $175,000, 30-year, fixed-rate mortgage. Option one is a 4.625% contract rate with 2.00 points. Option two is 4.25% contract rate but you have forgotten how many discount points are charged. Both loans have a 3% prepayment penalty.
A. Calculate the number of points on option two that would equalize the APRs of the two loans.
B. Calculate the number of points on option two that would equalize the effective costs of the two loans over a five-year holding period.
2. Suppose you take a 30 year fixed-rate mortgage for $150,000 at 6.00%, monthly payments with a two discount point rebate (negative discount points) to the borrower. Assume that you have no other financing fees.
A. What is the APR of the loan?
B. What is the effective cost with a five-year holding period?