Homework Answers
Obviously the amount payable is more in taking the loan @ 6 % which increase by 1 point per year as the interest rate is more when compared to loan @ 5 1/2% which increase by 4 points per year.
At the end of 7th year of repayment of loan, he will pay interest of 5.74 % of outstanding (5 1/2% + .04*6) when he opt for 5 1/2 rate interest.
If he opt for 6 % rate, then he will repay and will interest at 6.06 % of outstanding ( 6% + .01*6) which is more than what we paid in 1st scenerio.
Hence he should take loan which carries 5 1/2 % rate with 4 points increase per year.
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