Question

LI nt to determine the regular payment amount,rounded to the nearest dollar: Consider the ollowing pair of mortigage loan options for a $140.0d Use 1-1+ mortgage. Which mortgage loan has the larger total cost (closing costs + the amount paid for points+total cost of interest)? By how much? Mortgage A 20-year fixed at 625% with closing costs of S2100 and 1 point Mortgage B 20-year fed at 4 5% with closing costs of S2100 and 4 points Choose the correct answer below, and fill in the answer box to complete your choice Round to the nearest dollar as needed) Mortgage B has a larger total cost than mortgage A by S O A. | O B. Mortgage A has a larger total cost than mortgage B by s

Answer 1

As per the formula given,

Regular monthly payment = P(r/n) /[1-(1+r/n)^-nt]

Here, for Mortgage A,

P = $140,000, r = 6.25%, n = 12, t = 20

Putting values in formula:

140000(6.25%/12) /[1-(1+6.25%/12)^-12x20]

729.1667 /0.712564

1,023.30, so mortgage A monthly payment is $1,023.30 and total payment in EMI will be $1,023.30 x 240 = $245,592

Add: Closing cost = $2100

Add: Points at 1% x 140000 = 14000

Less: principal value = -140000

Total cost of mortgage A = $121,692

For Mortgage B,

P = $140,000, r = 4.5%, n = 12, t = 20

Putting values in formula:

140000(4.5%/12) /[1-(1+4.5%/12)^-12x20]

525 /0.592745

885.71, so mortgage b monthly payment is $885.71 and total payment in EMI will be $885.71 x 240 = $212,570.40

Add: Closing cost = $2100

Add: Points at 4% x 140000 = 56000

Less: principal value = -140000

Total cost of mortgage B = $130,670

Option A is correct , Mortgage B has larger total cost than B by $8,978(130670-121692)