You plan to purchase a house for $115,000 using a 30-year mortgage from your local bank. You will make a down payment of 20% of the purchase price.
A. Your bank offers you the following two options for payment:
Option 1: Mortgage rate of 9% and zero discount points.
Option 2: Mortgage rate of 8.85% and two discount points.
Which option would you choose?
b) Your bank offers you the following two options for payment:
Option 1: Mortgage rate of 10.25% and 1 discount point.
Option 2: Mortgage rate of 10% and 2.5 discount points.
Which option would you choose? [Hint: consider only the incremental costs and benefits of Option 2 with respect to Option 1]