Suppose you have two options on a $200,000, 30-year, fixed-rate mortgage. Option one is a 4.25% contract rate with 2.00 points. Option two is 4.00% 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.