Chapter 5.7, Problem 75AYU

Critical Thinking You have just contracted to buy a house and will seek financing in the amount of $\$100,000$. You go to several banks. Bank 1 will lend you $\$100,000$ at the rate of $4.125\%$ amortized over 30 years with a loan origination fee of $0.45\%$. Bank 2 will lend you $\$100,000$ at the rate of $3.375\%$ amortized over 15 years with a loan origination fee of $0.95\%$. Bank 3 will lend you $\$100,000$ at the rate of $4.25\%$ amortized over 30 years with no loan origination fee. Bank 4 will lend you $\$100,000$ at the rate of $3.625\%$ amortized over 15 years with no loan origination fee. Which loan would you take? Why? Be sure to have sound reasons for your choice. Use the information in the table to assist you. If the amount of the monthly payment does not matter to you, which loan would you take? Again, have sound reasons for your choice. Compare your final decision with others in the class. Discuss.

To determine

To find: Critical Thinking You have just contracted to buy a house and will seek financing in the amount of $\text{\$100,000}$. You go to several banks. Bank 1 will lend you $\$100,000$ at the rate of $4.12\text{5\%}$ amortized over 30 years with a loan origination fee of $\text{0}\text{.45\%}$. Bank 2 will lend you $\$100,000$ at the rate of $3.37\text{5\%}$ amortized over 15 years with a loan origination fee of $\text{0}\text{.95\%}$. Bank 3 will lend you $\$100,000$ at the rate of $4.2\text{5\%}$ amortized over 30 years with no loan origination fee. Bank 4 will lend you $\$100,000$ at the rate of $3.62\text{5\%}$ amortized over 15 years with no loan origination fee. Which loan would you take? Why? Be sure to have sound reasons for your choice. Use the information in the table to assist you. If the amount of the monthly payment does not matter to you, which loan would you take? Again, have sound reasons for your choice. Compare your final decision with others in the class. Discuss.

Answer to Problem 75AYU

Solution:

Bank 2

Explanation of Solution

Given:

Bank 1 will lend you $\$100,000$ at the rate of $\text{4}\text{.125\%}$ amortized over 30 years with a loan origination fee of $\text{0}\text{.45\%}$. Bank 2 will lend you $\$100,000$ at the rate of $\text{3}\text{.375\%}$ amortized over 15 years with a loan origination fee of $0.9\text{5\%}$. Bank 3 will lend you $\$100,000$ at the rate of $4.2\text{5\%}$ amortized over 30 years with no loan origination fee. Bank 4 will lend you $\$100,000$ at the rate of $3.62\text{5\%}$ amortized over 15 years with no loan origination fee.

Calculation:

Bank 1:

Number of years: 30

Monthly payment: $\$485$

Loan Origination fee: $\$450$

Total amount $= 30\times 12\times 485+450=1,75,050$

Bank 2:

Number of years: 15

Monthly payment: $\$709$

Loan Origination fee: $\$950$

Total amount $= 15\times 12\times 709+950=1,28,570$

Bank 3:

Number of years: 30

Monthly payment: 492

Total amount $= 30\times 12\times 492=1,77,120$

Bank 4:

Number of years: 15

Monthly payment: $\$721$

Total amount $= 15\times 12\times 721=1,29,780$

I suggest Bank 2 for home loan.