3. You are purchasing a new home and need to borrow $325,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.5% APR for a 30-year fixed rate mortgage (with payments made at the end of each month). The mortgage lender also tells you that if you are willing to pay one point, they can offer you a lower rate of 6.25% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $3,250 to cover points you are paying the lender. Assuming that you do not intend to prepay your mortgage (pay off your mortgage early), are you better off paying the one point and borrowing at 6.25% APR or just taking out the loan at 6.5% without any points?
3. You are purchasing a new home and need to borrow $325,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.5% APR for a 30-year fixed rate mortgage (with payments made at the end of each month). The mortgage lender also tells you that if you are willing to pay one point, they can offer you a lower rate of 6.25% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $3,250 to cover points you are paying the lender. Assuming that you do not intend to prepay your mortgage (pay off your mortgage early), are you better off paying the one point and borrowing at 6.25% APR or just taking out the loan at 6.5% without any points?
Chapter5: The Time Value Of Money
Section: Chapter Questions
Problem 15P
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![3. You are purchasing a new home and need to borrow $325,000 from a mortgage lender. The mortgage
lender quotes you a rate of 6.5% APR for a 30-year fixed rate mortgage (with payments made at the end
of each month). The mortgage lender also tells you that if you are willing to pay one point, they can offer
you a lower rate of 6.25% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan
value. So if you take the lower rate and pay the points, you will need to borrow an additional $3,250 to
cover points you are paying the lender. Assuming that you do not intend to prepay your mortgage (pay
off your mortgage early), are you better off paying the one point and borrowing at 6.25% APR or just
taking out the loan at 6.5% without any points?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F12329165-83a7-4f90-ae4e-cd06099490e5%2Ff1c62349-fef8-4ae4-ab4a-32bb4dea0888%2F0lnuli_processed.png&w=3840&q=75)
Transcribed Image Text:3. You are purchasing a new home and need to borrow $325,000 from a mortgage lender. The mortgage
lender quotes you a rate of 6.5% APR for a 30-year fixed rate mortgage (with payments made at the end
of each month). The mortgage lender also tells you that if you are willing to pay one point, they can offer
you a lower rate of 6.25% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan
value. So if you take the lower rate and pay the points, you will need to borrow an additional $3,250 to
cover points you are paying the lender. Assuming that you do not intend to prepay your mortgage (pay
off your mortgage early), are you better off paying the one point and borrowing at 6.25% APR or just
taking out the loan at 6.5% without any points?
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